<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 033-56443) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. 9
POST-EFFECTIVE AMENDMENT NO. --
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 9
VANGUARD HORIZON FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
It is hereby requested that this registration statement be declared effective on
June 30, 1995, or as soon thereafter as the Commission may determine.
REGISTRANT HEREBY REQUESTS THAT THE EFFECTIVE DATE OF THIS REGISTRATION
STATEMENT BE ACCELERATED TO JUNE 30, 1995 IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933.
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<PAGE> 2
VANGUARD HORIZON FUND, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<S> <C> <C>
Item 1. Cover Page.................................... Cover Page
Item 2. Synopsis...................................... Highlights
Item 3. Condensed Financial Information............... N/A
Item 4. General Description of Registrant............. Investment Objectives; Investment
Limitations; Investment Policies;
General Information
Item 5. Management of the Fund........................ Directors and Officers; Management of
the Fund; The Vanguard Group
Item 6. Capital Stock and Other Securities............ Opening an Account and Purchasing
Shares; Selling Your Shares; The
Share Price of Each Portfolio;
Dividends, Capital Gains, and Taxes;
General Information
Item 7. Purchase of Securities Being Offered.......... Cover Page; Opening an Account and
Purchasing Shares
Item 8. Redemption or Repurchase...................... Selling Your Shares
Item 9. Pending Legal Proceedings..................... Not Applicable
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<S> <C> <C>
Item 10. Cover Page.................................... Cover Page
Item 11. Table of Contents............................. Cover Page
Item 12. General Information and History............... Investment Objectives and Policies;
General Information
Item 13. Investment Objective and Policies............. Investment Objectives and Policies;
Investment Limitations
Item 14. Management of the Fund........................ Management of the Fund
Item 15. Control Persons and Principal Holders of
Securities.................................... Management of the Fund; General
Information
Item 16. Investment Advisory and Other Services........ Management of the Fund
Item 17. Brokerage Allocation.......................... Not Applicable
Item 18. Capital Stock and Other Securities............ General Information; Financial
Statement
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Redemption of
Shares
Item 20. Tax Status.................................... Appendix
Item 21. Underwriters.................................. Not Applicable
Item 22. Calculations of Yield Quotations of Money
Market Fund................................... Not Applicable
Item 23. Financial Statements.......................... Financial Statement
</TABLE>
<PAGE> 3
VANGUARD HORIZON FUND
PROSPECTUS SUPPLEMENT
JULY 24, 1995
The 1% fee may be waived, at the discretion of the Fund's
management.
IN69
<PAGE> 4
[VANGUARD LOGO]
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P R O S P E C T U S
JUNE 30, 1995; REVISED JULY 24, 1995
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<PAGE> 5
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[VANGUARD LOGO] A Member of the Vanguard Group
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PROSPECTUS -- JUNE 30, 1995; REVISED JULY 24, 1995
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NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT -- 1-800-662-7447
(SHIP)
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SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT -- 1-800-662-2739
(CREW)
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INVESTMENT Vanguard Horizon Fund, Inc. (the "Fund") is an open-end
OBJECTIVES AND diversified investment company. The Fund offers four distinct
POLICIES Portfolios each of which seeks to provide maximum long-term
total return. Each Portfolio will pursue this objective using
very different strategies and investment policies; thus, the
Portfolios will expose shareholders to an array of different
risks.
The AGGRESSIVE GROWTH PORTFOLIO invests in U.S. equity
securities, emphasizing medium- and small-capitalization
companies. The CAPITAL OPPORTUNITY PORTFOLIO invests primarily
in U.S. equity securities, emphasizing those companies with
rapid earnings growth prospects. The GLOBAL ASSET ALLOCATION
PORTFOLIO invests in a varying mix of U.S. and foreign stocks,
bonds and cash reserves. The GLOBAL EQUITY PORTFOLIO invests
in U.S. and foreign equity securities that, in the adviser's
view, offer attractive total return prospects.
There is no assurance that the Portfolios will achieve their
stated objectives. Shares of the Fund are neither insured nor
guaranteed by any agency of the U.S. Government, including the
FDIC.
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OPENING AN To open a regular (non-retirement) account, please complete
ACCOUNT and return the Account Registration Form. If you need
assistance in completing the form, please call the Investor
Information Department at 1-800-662-7447. To open an
Individual Retirement Account (IRA), please use a Vanguard IRA
Adoption Agreement. To obtain a copy of this agreement, call
the Investor Information Department, Monday through Friday,
from 8:00 a.m. to 9:00 p.m. and Saturday, from 9:00 a.m. to
4:00 p.m. (Eastern time). The minimum initial investment is
$3,000 ($500 for Individual Retirement Accounts and Uniform
Gifts/Transfers to Minors Act accounts.) The Fund is offered
on a no-load basis (i.e., there are no sales commissions or
12b-1 fees). However, the Fund incurs expenses for investment
advisory, management, administrative and distribution
services.
IMPORTANT NOTE: If shares of the Portfolios are redeemed or exchanged prior to
1% REDEMPTION FEE being held for five years, they will be subject to a 1%
redemption fee which is paid directly to the Portfolios. See
"Fund Expenses."
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ABOUT THIS This prospectus is designed to set forth concisely the
PROSPECTUS information you should know about the Fund before you invest.
It should be retained for future reference. A "Statement of
Additional Information" containing additional information
about the Fund has been filed with the U.S. Securities and
Exchange Commission. This statement is dated June 30, 1995;
Revised July 24, 1995 and has been incorporated by reference
into this Prospectus. A copy may be obtained without charge by
writing to the Fund or by calling the Investor Information
Department.
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Page Page Page
Highlights ...................... 2 Who Should Invest .............. 18 SHAREHOLDER GUIDE
Fund Expenses ................... 6 Supplemental Investment Opening an Account and
Yield and Total Return .......... 7 Policies ...................... 20 Purchasing Shares ............ 33
FUND INFORMATION Investment Limitations ......... 23 When Your Account Will Be
Portfolio Summaries: Investment Management of The Fund ........ 23 Credited .................... 36
Objective, Risks & Policies Investment Advisers ............ 24 Selling Your Shares .......... 37
- - Aggressive Growth Dividends, Capital Gains Exchanging Your Shares ........ 39
Portfolio ..................... 9 and Taxes .................... 29 Important Information About
- - Capital Opportunity The Share Price of Each Telephone Transactions ........ 40
Portfolio ..................... 11 Portfolio ..................... 31 Transferring Registration ..... 41
- - Global Asset Allocation General Information ............ 32 Other Vanguard Services ....... 41
Portfolio ..................... 14
- - Global Equity Portfolio ...... 17
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<PAGE> 6
HIGHLIGHTS
OVERVIEW AND Vanguard Horizon Fund is an open-end diversified
OBJECTIVES investment company designed for investors with
long-range investment goals. The Fund offers a choice of
four distinct actively-managed Portfolios, each seeking
maximum long-term total return. The Portfolios' advisers
have been granted substantial investment flexibility and
each will take a different investment approach to
pursuing maximum long-term total return, although there
is no assurance that such returns can be achieved.
Investors in any of the Portfolios can expect returns to
be less predictable than returns from Funds that
parallel a particular index or follow a strict set of
investment guidelines. Therefore, an investment in the
Fund is appropriate only for those investors who have
the perspective, patience, and financial resources
necessary to assume above-average risk and volatility in
exchange for the potential of achieving above-average
long-term returns.
The Fund may be appropriate for investors who already
have a well-balanced core portfolio -- one including
stocks, bonds, and money market instruments -- and want
to add an extra dimension of aggressive investing.
Shares of the Fund are offered on a no-load basis,
although the Fund incurs certain distribution expenses
and assesses a 1% redemption fee if shares being
redeemed or exchanged have been held for less than five
years.
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THE FOUR The AGGRESSIVE GROWTH PORTFOLIO invests in U.S. equity
PORTFOLIOS securities, emphasizing medium- and small-capitalization
companies.
The CAPITAL OPPORTUNITY PORTFOLIO invests primarily in
U.S. equity securities, emphasizing those companies with
rapid earnings growth prospects.
The GLOBAL ASSET ALLOCATION PORTFOLIO invests in a
varying mix of both U.S. and foreign stocks, bonds, and
cash reserves.
The GLOBAL EQUITY PORTFOLIO invests in U.S. and foreign
equity securities that, in the adviser's view, offer
attractive total return prospects.
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INVESTMENT While each of the Portfolios seek the same investment
POLICIES objective -- maximum long-term total return -- each
Portfolio pursues the objective using different
investment strategies. The grid on page 3 shows, at-a-
glance, some of the financial instruments, investment
techniques and
2
<PAGE> 7
analytic methods employed by each Portfolio in pursuit
of maximum long-term total return.
<TABLE>
<CAPTION> ----------------------------------------------------------------------------------
GLOBAL
AGGRESSIVE CAPITAL ASSET GLOBAL
X PRIMARY EMPHASIS GROWTH OPPORTUNITY ALLOCATION EQUITY
XX SECONDARY EMPHASIS PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL INSTRUMENTS
----------------------------------------------------------------------------------
Invests in U.S. stocks X X X X
----------------------------------------------------------------------------------
Emphasizes smaller
company stocks X X
----------------------------------------------------------------------------------
Invests in foreign stocks XX X X
----------------------------------------------------------------------------------
Invests in foreign bonds X
----------------------------------------------------------------------------------
Invests in foreign
cash reserves XX
----------------------------------------------------------------------------------
Invests in futures contracts XX XX X XX
----------------------------------------------------------------------------------
Invests in forward
currency contracts XX XX
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Invests in put options XX
----------------------------------------------------------------------------------
INVESTMENT TECHNIQUES
----------------------------------------------------------------------------------
Holds a small number
of stocks XX
----------------------------------------------------------------------------------
Sells stocks short XX
----------------------------------------------------------------------------------
ANALYTIC METHODS
----------------------------------------------------------------------------------
Uses quantitative
computer models X X
----------------------------------------------------------------------------------
Uses fundamental analysis X X
----------------------------------------------------------------------------------
</TABLE>
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RISK Each of the Portfolios will expose investors to
CHARACTERISTICS substantial risk in pursuit of maximum long-term total
return. The following table depicts the principal risks
inherent in the Portfolios of the Fund:
<TABLE>
<CAPTION>
SECURITIES FOREIGN MANAGER
PORTFOLIO MARKET RISK MARKET RISK RISK
---------- ------------ ------------ --------
<S> <C> <C> <C>
Aggressive Growth...... High Low High
Capital Opportunity.... High Low High
Global Asset
Allocation........... High High High
Global Equity.......... High High High
</TABLE>
SECURITIES MARKET RISK: Common stock prices have
historically fluctuated substantially over short-term
periods. Bond prices also fluctuate in response to
interest rate changes with prices declining as interest
rates increase.
FOREIGN MARKET RISK: Investments in foreign securities
may have greater risks than similar U.S. investments.
These risks involve many facets of foreign investing,
including: less liquid and/or efficient markets, less
regulation, and uncertain political events. In addition,
the value of foreign investments is affected by
fluctuations in foreign currency values.
3
<PAGE> 8
MANAGER RISK: The manager, or adviser, of each Portfolio
is responsible for implementation of the Portfolio's
investment policies. Manager risk encompasses the
potential for the Portfolio to fail to achieve its
objective due to investment decisions made by the
investment adviser. Portfolios whose advisers have the
greatest flexibility therefore have the most manager
risk. Investors should be aware that each adviser may
fail to achieve the Portfolio's objective and the
investment results may fall short of comparable
benchmarks. PAGE 13
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SPECIAL (1) Each Portfolio of the Fund may invest a portion of
CONSIDERATIONS its assets in futures contracts, options,
convertible securities and swap agreements.
Investors in the GLOBAL ASSET ALLOCATION PORTFOLIO
should be aware that the Portfolio may invest up to
50% of its net assets in futures contracts instead
of directly holding securities. The advisers will
not use futures to leverage the Portfolios'
holdings, but only as a more efficient means to
implement their investment decisions. PAGE 20
(2) Each Portfolio may invest in short-term fixed income
securities. PAGE 20
(3) Each Portfolio may lend its securities. PAGE 21
(4) Each Portfolio may borrow money. PAGE 23
(5) The CAPITAL OPPORTUNITY PORTFOLIO may utilize the
hedging and defensive techniques of selling stocks
short, purchasing index put options, and increasing
cash reserves. As a guideline, the value of
investments from these three strategies in
combination will not exceed 25% of the Portfolio's
net assets. PAGE 11
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THE VANGUARD The Fund is a member of The Vanguard Group of Investment
GROUP Companies, a group of over 30 investment companies with
over 80 distinct investment portfolios and total assets
in excess of $150 billion. The Vanguard Group, Inc.
("Vanguard"), a subsidiary jointly owned by The Vanguard
Funds, provides all corporate, management,
administrative, distribution and shareholder accounting
services on an at-cost basis to the Funds in the
Group. PAGE 23
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INVESTMENT The Portfolios of the Fund receive investment advisory
ADVISERS services as follows:
<TABLE>
<CAPTION>
PORTFOLIO ADVISER
--------- --------
<S> <C>
Aggressive Growth Portfolio Vanguard's Core Management
Group
Capital Opportunity Portfolio Husic Capital Management
Global Asset Allocation Portfolio Strategic Investment
Management
Global Equity Portfolio Marathon-Asset Management
</TABLE>
The advisers discharge their responsibilities subject to
the control of the Officers and Directors of the
Fund. PAGE 24
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4
<PAGE> 9
DIVIDENDS, CAPITAL Income is expected to be modest in the CAPITAL
GAINS AND TAXES OPPORTUNITY and GLOBAL EQUITY PORTFOLIOS; however, it
may be more significant, from time to time, for the
AGGRESSIVE GROWTH and the GLOBAL ASSET ALLOCATION
PORTFOLIOS.
The Portfolios will distribute net investment income, if
any, in the form of dividends annually. Net realized
capital gains distributions, if any, will also be made
annually. A sale of shares of a Portfolio is a taxable
event and may result in a capital gain or loss. Dividend
distributions, capital gains distributions, and capital
gains or losses from redemptions and exchanges may be
subject to federal, state and local taxes. PAGE 29
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PURCHASING You may purchase shares by mail, wire or exchange from
SHARES another Vanguard Fund. The minimum initial investment is
$3,000 ($500 for Individual Retirement Accounts and
Uniform Gifts/Transfers to Minors Act accounts); the
minimum for subsequent investments is $100. There are no
sales commissions or 12b-1 fees (see below for
information on redemption fees), although certain
redemptions of Fund shares are subject to a 1%
redemption fee as described below. PAGE 33
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SELLING SHARES You may redeem shares of each Portfolio in writing or by
telephone. Shares of the Portfolios that are redeemed or
exchanged prior to being held for five years will be
subject to a 1% redemption fee paid directly to the
Portfolios. The price of each Portfolio is expected to
fluctuate, and may at redemption be more or less than at
the time of initial purchase, resulting in a gain or
loss. PAGE 37
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EXCHANGING You may exchange a Portfolio's shares for those of
SHARES another Portfolio of the Fund or other Vanguard Funds.
An exchange from one of the Portfolios is considered a
redemption and will be subject to a 1% redemption fee if
the shares were held for less than 5 years. The
redemption fee is paid directly to the
Portfolios. PAGE 39
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SERVICES TO The Fund offers special services: Fund Express, for
SHAREHOLDERS electronic transfers between the Fund and your bank
account; Tele-Account, for 24-hour telephone access to
your Fund account balances and certain transactions;
Direct Deposit, for automatic deposit of payroll checks;
Average Cost Statement, for determination of the average
cost of shares redeemed for tax purposes; Dividend
Express, for automatic transfer of dividends and/or
capital gains to a bank account. PAGE 41
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5
<PAGE> 10
FUND The following table illustrates ALL of the expenses and
EXPENSES fees you would incur as a shareholder of the Fund. The
expenses and fees set forth below are estimates for the
Portfolios' first full year of operations, since the
Fund had not commenced operations as of the date of this
prospectus.
<TABLE>
<CAPTION> GLOBAL
SHAREHOLDER AGGRESSIVE CAPITAL ASSET GLOBAL
TRANSACTION GROWTH OPPORTUNITY ALLOCATION EQUITY
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------------------------------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Sales Load Imposed
on Purchases........... None None None None
Sales Load Imposed on
Reinvested Dividends... None None None None
Redemption (and Exchange
Redemption) Fees*:
shares held less than
5 years.............. 1% 1% 1% 1%
shares held 5 years
or more.............. None None None None
Exchange Fees**.......... None None None None
</TABLE>
* The fees withheld from redemption proceeds are paid
to the Portfolios.
** Exchanges will be treated as redemptions for purposes
of imposing the redemption fees.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO GLOBAL
OPERATING EXPENSES AGGRESSIVE CAPITAL ASSET GLOBAL
(AS A PERCENTAGE OF GROWTH OPPORTUNITY ALLOCATION EQUITY
NET ASSETS) PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------------------- ---------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Management &
Administrative
Expenses............... .28% .28% .28% .28%
Investment Advisory
Fees................... .02 .40 .40 .45
12b-1 Fees............... None None None None
Other Expenses
Distribution Costs..... .02% .02% .02% .02%
Miscellaneous
Expenses............. .06 .06 .15 .15
------- ------- ------- -------
Total Other Expenses..... .08 .08 .17 .17
TOTAL OPERATING
EXPENSES........... .38% .76% .85% .90%
======= ======= ====== ======
</TABLE>
The purpose of this table is to assist you in
understanding the various costs and expenses that you
would bear directly or indirectly as an investor in the
Fund.
1% REDEMPTION FEE The Portfolios of the Fund are intended for long-term
investors who can withstand substantial price
fluctuations. For this reason, the Portfolios will
assess a 1% redemption fee on shares that are redeemed,
or redeemed by exchange, before they have been held for
five years. For purposes of calculating the five-year
holding period the Portfolio will use the "first-in,
first-out" (FIFO) method. That is, the date of the
redemption or exchange will be compared to the earliest
purchase date. If this holding period is less than five
years, the fee will be assessed. The fee
6
<PAGE> 11
will be prorated if a portion of the shares being
redeemed or exchanged has been held for five years or
more. This fee will not apply to shares purchased
through dividend or capital gain reinvestment. In the
event of an early redemption due to a shareholder's
death, all redemption fees will be waived. A certified
copy of the death certificate must be provided to
substantiate the death.
The fee is paid directly to the Portfolios to offset the
cost of short-term trading and other transaction costs.
As such, the fee is considered a benefit to long-term
investors. It is not a contingent deferred sales charge.
The following example illustrates the expenses that you
would incur on a $1,000 investment over various periods,
assuming (1) a 5% annual rate of return and (2)
redemption at the end of each period. A 1% redemption
fee is included in the expenses because the time periods
illustrated are less than five years.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
Aggressive Growth Portfolio................ $14 $24
Capital Opportunity Portfolio.............. $18 $36
Global Asset Allocation Portfolio.......... $19 $38
Global Equity Portfolio.................... $20 $40
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL
EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
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YIELD AND From time to time the Portfolios may advertise their
TOTAL RETURN yield and total return. Both yield and total return
figures are based on historical earnings and are not
intended to indicate future performance. The "total
return" of the Portfolios refers to the average annual
compounded rates of return over one-, five-, and
ten-year periods or for the life of the Portfolios (as
stated) that would equate an initial amount invested at
the beginning of a stated period to the ending
redeemable value of the investment, assuming the
reinvestment of all dividend and capital gains
distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of a Portfolio is calculated by dividing net
investment income per share earned during the 30-day
period by the net asset value per share on the last day
of the period. Net investment income includes interest
and dividend income earned on the Portfolio's
securities; it is net of all expenses and all recurring
and nonrecurring charges that have been applied to all
shareholder accounts. The yield calculation assumes that
net investment income earned over 30 days is compounded
monthly for six months and then annualized. Methods used
to calculate advertised yields are standardized for all
stock and bond mutual funds. However, these methods
differ from the accounting methods used by the
Portfolios to maintain their books and records, and so
the advertised 30-day yield may not fully reflect the
income paid to your own account.
7
<PAGE> 12
Also, the Portfolios may compare their performance to
that of various stock market indices, including, but not
limited to, the Standard & Poor's 500 Composite Stock
Price Index.
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OVERVIEW OF The Fund is an open-end diversified investment company
PORTFOLIOS offering four distinct Portfolios. The Portfolios invest
in securities that are deemed by their advisers to have
attractive total return potential. The Aggressive
Growth, Capital Opportunity, and Global Equity
Portfolios invest primarily in common stocks while the
Global Asset Allocation Portfolio invests in common
stocks, bonds, and cash reserves. The Portfolios of the
Fund are managed without regard to tax ramifications.
Each Portfolio of the Fund is authorized to invest in
stock index futures, options, and swap agreements to a
limited extent. Each Portfolio is permitted to hold
equity securities other than common stock, such as
debentures or preferred stock that is convertible to
common stock. See "SUPPLEMENTAL INVESTMENT POLICIES" for
a description of these and other investment practices of
the Fund.
The investment objectives and policies of the Fund are
not fundamental and so may be changed by the Board of
Directors without shareholder approval. However,
shareholders would be notified prior to a material
change in either.
Pages 9 to 19 of this prospectus contain a description
of each Portfolio's investment objective, policies and
risks.
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8
<PAGE> 13
AGGRESSIVE GROWTH PORTFOLIO
INVESTMENT The Aggressive Growth Portfolio seeks to provide maximum
OBJECTIVE long-term total return and is therefore intended for
investors who have a long-term investment horizon. To
that end, the Portfolio will assume above-average risk
in seeking potentially above-average returns, although
there is no assurance that the Portfolio will achieve
such returns. Income provided by the Portfolio may
fluctuate significantly.
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INVESTMENT The Aggressive Growth Portfolio invests in U.S. equity
POLICIES securities and emphasizes medium- and
small-capitalization companies*. At least 65% of the
Portfolio's assets will be invested in such companies
under normal circumstances. The Portfolio's exposure to
foreign securities is expected to be minimal. The
Portfolio will generally be diversified across a wide
range of industries; however, the investment adviser may
either overweight or under weight certain industries.
The Portfolio's adviser, Vanguard's Core Management
Group, utilizes a proprietary quantitative valuation
methodology to identify, from a large universe of
companies, those common stocks with the best total
return potential. Stocks are generally categorized based
on two dimensions: (i) market capitalization (i.e.,
small, medium and large) and (ii) growth versus value.
The portion of the Portfolio's assets invested in any
one these categories will vary over time depending upon
Core Management's expectation for each segment's total
return potential. The Portfolio, however, is more likely
to be invested in small- and medium-capitalization
stocks than large-capitalization stocks. Among the
characteristics used in stock selection are (i) market
liquidity; (ii) valuation measures; and (iii) financial
strength relative to other stocks.
The Portfolio is expected to remain fully invested in
equity securities. However, the proportion of cash
reserves held by the Portfolio may increase if the
adviser feels a conservative investment approach is
warranted.
* Small capitalization stocks are generally those of
companies with market capitalizations of $500
million-$2 billion. Mid-Capitalization stocks are
issued by companies with market capitalizations of $2
billion to $14 billion.
- --------------------------------------------------------------------------------
INVESTMENT The Portfolio exposes investors to the market risks
RISKS associated with U.S. equity investments. The Standard &
SECURITIES MARKET Poor's 500 Composite Stock Price Index ("S&P 500
RISK Index"), which can be used as a proxy for the U.S. stock
market, has provided annual total returns (capital
appreciation plus dividend income) averaging +12.2% for
the period from 1926 to 1994. While this average return
can be used as a guide for setting reasonable
expectations for future stock market returns, it may not
be useful for forecasting future returns in any
particular period, as stock market returns are quite
volatile from year to year. The return in individual
years has varied from a low of -43.3% to a high of
+53.9%, reflecting the short-term volatility of stock
prices.
9
<PAGE> 14
Furthermore, the Portfolio emphasizes medium- and
small-capitalization stocks which have historically been
more volatile in price than the S&P 500 Index. Among the
likely reasons for the greater price volatility of small
company stocks are less than certain growth prospects of
smaller firms, a lower degree of liquidity in the
markets for such stocks, and the small to negligible
dividends generally paid by small companies. Besides
exhibiting greater volatility, small- and
mid-capitalization stocks have at times fluctuated
independently of the broad stock market. Investors
should therefore expect that small- and
mid-capitalization stocks (and hence the Aggressive
Growth Portfolio) may be more volatile than the S&P 500
Index.
MANAGER RISK The Portfolio exposes investors to substantial manager
risk which encompasses the potential for the Portfolio
to fail to achieve its objective due to activities of
the investment adviser. Vanguard's Core Management
Group, the Portfolio's investment adviser, selects
stocks based primarily on quantitative models. There is
no assurance that the quantitative methodology applied
by the adviser will enable the Portfolio to meet its
stated objective.
- --------------------------------------------------------------------------------
10
<PAGE> 15
CAPITAL OPPORTUNITY PORTFOLIO
INVESTMENT The Capital Opportunity Portfolio seeks to provide
OBJECTIVE maximum long-term total return and is therefore intended
for investors who have a long-term investment horizon.
To that end, the Portfolio will assume above-average
risk in seeking potentially above-average returns,
although there is no assurance that the Portfolio will
achieve such returns. Income generated by the Portfolio
is expected to be minimal.
- --------------------------------------------------------------------------------
INVESTMENT The Capital Opportunity Portfolio invests primarily in
POLICIES medium- and small-capitalization U.S. equity securities
emphasizing companies with rapid earnings growth
prospects. The Portfolio may hold up to 15% of its
assets in foreign securities. The Portfolio is expected
to be concentrated in as few as 25 to 50 stocks.
The Portfolio's adviser, Husic Capital Management,
applies a "classic" fundamental investment strategy
using security analysis to identify the stocks deemed
most attractive. When selecting stocks, the investment
adviser will: (i) focus on early recognition of change
that leads to high expected earnings growth; (ii)
concentrate in those sectors and industries deemed to
offer the possibility of high returns; and (iii)
maintain a flexible attitude towards identifying growth
opportunities. The adviser will emphasize emerging and
established growth companies, but will also select
cyclical and non-traditional growth companies when
appropriate. Opportunistically, the adviser may also
select convertible and high yield securities for the
Portfolio. In each of these categories, exposure will be
limited to 10% of the Portfolio's net assets.
In an attempt to reduce downside risk, Husic Management
Company may utilize the following hedging and defensive
techniques:
- sell short stocks considered to have fundamental
problems; limited to 10% of the Portfolio's net
assets.
- purchase put options; limited to 10% of the
Portfolio's net assets.
- increase cash reserves up to 15% of the Portfolio's
net assets for temporary defensive purposes.
As a guideline, the value of investments from these
three strategies in combination will not exceed 25% of
the Portfolio's net assets.
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INVESTMENT The Portfolio exposes investors to the market risks
RISKS associated with U.S. equity investments. The Standard &
SECURITIES MARKET Poor's 500 Composite Stock Price Index ("S&P 500 Index")
RISKS which can be used as a proxy for the U.S. stock market,
has provided annual total returns (capital appreciation
plus dividend income) averaging +12.2% for the period
from 1926 to 1994. While this average return can be used
as a guide for setting reasonable expectations for
future stock market returns, it may not be useful for
forecasting future returns in any particular period, as
stock market returns are quite volatile from year to
year. The return in individual years has varied from a
low of -43.3% to a high of +53.9%, reflecting the
short-term volatility of stock prices.
11
<PAGE> 16
Furthermore, the Portfolio emphasizes medium- and
small-capitalization stocks which have historically been
more volatile in price than the S&P 500 Index. Among the
likely reasons for the greater price volatility of small
company stocks are less certain growth prospects of
smaller firms, a lower degree of liquidity in the
markets for such stocks, and the small to negligible
dividends generally paid by small companies. Besides
exhibiting greater volatility, small- and
mid-capitalization stocks have at times fluctuated
independently of the broad stock market. Investors
should therefore expect small- and mid-capitalization
stocks (and hence the Capital Opportunity Portfolio) may
be more volatile than the S&P 500 Index.
The Portfolio exposes investors to industry specific
risk -- i.e., the possibility that a particular group of
related stocks will decline in price due to industry
specific developments. The Portfolio will focus its
holdings in those industries and securities that, in the
adviser's opinion, offer the best prospects of high
returns. The Portfolio is expected to hold from 25 to 50
securities and may invest a large portion of the
Portfolio's holdings in a specific industry.
The Portfolio will also expose investors to the risks
associated with the short selling of stocks. Short
selling involves selling shares of stock which the
Portfolio does not own, with the expectation that the
stock's price will fall. The principal purpose of making
a short sale is to enable the Portfolio to benefit from
an expected decline in a stock's price. The risk of loss
associated with a short sale is greater than that
associated with a regular purchase. In a regular
purchase, possible loss is limited to the amount for
which the security was purchased. In a short sale, the
potential loss is unlimited. Assets committed to short
sales of stocks will not exceed 10% of the Portfolio's
net assets. With respect to short sales, the Portfolio
will segregate cash or U.S. Government securities in an
amount equal to the difference between the market value
of any securities sold short and any amount required to
be deposited with the broker in connection with such
short sales.
The Portfolio will also expose investors, on a limited
basis, to the risks of convertible securities and low
quality bonds. Investments in such issues will be made
when the adviser believes that the potential gains
significantly outweigh the risks. Exposure to each of
these categories: convertible securities and low-quality
bonds, will not exceed 10% of the Portfolio's net
assets.
The Portfolio exposes investors to the risks associated
with investments in put options. The risk of loss
associated with a put option is limited to the price
paid for the option. Assets committed to put options
will not exceed 15% of the Portfolio's net assets. The
Portfolio's adviser is permitted to invest in index put
options in order to "hedge" or protect a relatively
small portion of net assets from losses during a market
or sector decline.
12
<PAGE> 17
FOREIGN The Portfolio may invest up to 15% of its net assets in
SECURITIES RISK foreign equity securities and therefore exposes
investors to foreign securities risk. For U.S.
investors, the returns of foreign securities are
influenced by not only the returns on foreign securities
themselves, but also by currency risk -- i.e., changes
in the value of currencies in which the securities are
denominated. In a period when the U.S. dollar rises in
value against foreign currencies, the returns on foreign
stocks for a U.S. investor will be diminished. By
contrast, the returns of foreign securities will be
enhanced in a period when the U.S. dollar declines.
(Please see "SUPPLEMENTAL INVESTMENT POLICIES" for
additional risks associated with investments in foreign
securities.)
MANAGER RISK The Portfolio exposes investors to substantial manager
risk which encompasses the potential for the Portfolio
to fail to achieve its objective due to activities of
the investment adviser. Husic Capital Management, the
Portfolio's investment adviser, manages the Portfolio
with broad flexibility, in an effort to provide maximum
long-term total return. The investment adviser selects
stocks based on economic, financial, as well as market
analysis and investment judgment. There is no assurance
that the Portfolio will achieve its stated objective.
- --------------------------------------------------------------------------------
13
<PAGE> 18
GLOBAL ASSET ALLOCATION PORTFOLIO
INVESTMENT The Global Asset Allocation Portfolio seeks to provide
OBJECTIVE maximum long-term total return and is therefore intended
for investors who have a long-term investment horizon.
To that end, the Portfolio will assume above-average
risk in seeking potentially above-average returns,
although there is no assurance that the Portfolio will
achieve such returns. Income provided by the Portfolio
is expected to fluctuate significantly. There is no
assurance that the Portfolio will achieve its stated
objective.
- --------------------------------------------------------------------------------
INVESTMENT The Global Asset Allocation Portfolio invests in a
POLICIES varying mix of stocks, bonds, and cash reserves selected
primarily from the following nine major markets: U.S.,
Japan, the United Kingdom, Germany, France, Spain,
Canada, Australia, and Hong Kong. The adviser may expand
the Portfolio's investment universe outside these major
markets at any time, and may include investments in
emerging markets. Under normal circumstances, at least
65% of the Portfolio's assets will be invested in
securities representing at least three different
countries. In order to execute its strategy in an
efficient manner, the Portfolio's adviser expects to
invest the portion of the Portfolio's assets that it has
determined should be allocated to stocks, primarily in
equity index futures contracts. The Portfolio will use
futures contracts (which are commonly referred to as
"derivatives") to provide an efficient means of
achieving exposure to the stock and fixed income markets
of a particular country. Stock index futures contracts
provide exposure to a whole index of stocks without
buying each security individually. The use of futures
contracts provides a cost efficient means of achieving
exposure to the stock or fixed income market of a
particular country. UNDER NO CIRCUMSTANCES WILL THE
MARKET EXPOSURE OF FUTURES CONTRACTS EXCEED 50% OF THE
PORTFOLIO'S NET ASSETS. (See page 20 for details of
futures transactions.) The adviser will not use futures
to leverage the Portfolio's holdings. Futures contracts
entail special risks which are described in detail on
page 20.
The Portfolio's adviser, Strategic Investment
Management, will use a variety of quantitative
investment models to identify the country and asset
classes deemed to be attractive. The adviser seeks asset
classes and countries with the highest expected relative
return premium, adjusted for risk (e.g., stocks in Japan
versus bonds in France). Valuation and liquidity
measures are the primary drivers of the model used to
determine the relative expected return premium for each
country and asset class. In evaluating equity exposure,
the adviser attempts to assess the relative value of
each country's market in aggregate rather than looking
at the stocks of individual companies. The adviser may
concentrate the Portfolio's investment "bets" in only a
few selected countries and/or asset classes; however, no
more than 50% of the Portfolio's net assets will be
invested in an asset class from a single country (e.g.,
French bonds). There is no limitation on the Portfolio's
U.S. assets.
14
<PAGE> 19
In attempting to achieve its objective, the Portfolio
will be managed to provide investment results superior
to a theoretical benchmark, the "Global Balanced Index",
with the following parameters:
60% global stock investments
30% global bond investments
10% U.S. cash reserve investments
The 60% global stock component is an adjusted
capitalization-weighted average of the established local
stock market index in each country. The 30% global bond
component is a capitalization-weighted average of the
country indices of the Salomon Brothers World Government
Bond Index; all such bonds are expected to be of
investment grade quality. The U.S. cash reserve
component is the bond equivalent yield of the Federal
Reserve's published average offering rate on 30-day
commercial paper. The index is adjusted to reduce the
exposure of foreign currency fluctuations by hedging
back into U.S. dollars one half of the foreign currency
exposure resulting from equity holdings and all of the
foreign currency exposure resulting from the bond
holdings. The countries included in this index will be
the U.S., Canada, the United Kingdom, France, Germany,
Spain, Japan, Australia and Hong Kong (there will be no
bond investments in Hong Kong). The Global Balanced
Index will be reviewed semi-annually and with approval
of the Fund's Officers may be changed to reflect
additions or deletions of countries from the adviser's
mandate going forward.
The adviser will predominately utilize an indexed
approach to common stock investing but, from time to
time, may execute modest "tilts" among common stock
holdings (e.g., lower than average market capitalization
or valuation levels) or hold an overweighted position in
a security intended to serve as a proxy for an entire
market (e.g., a closed-end country fund).
Investments will also include direct investments in
short-term or long-term government bonds, and U.S. and
foreign cash reserves. Bonds in the Portfolio are
expected to range in maturity from one to 30 years. The
Portfolio may also enter into forward currency exchange
contracts in order to protect its securities from
fluctuations in exchange rates. (Please see
"SUPPLEMENTAL INVESTMENT POLICIES" for a description of
such contracts.)
- --------------------------------------------------------------------------------
INVESTMENT Market risk for the Portfolio will depend both on the
RISKS adviser's allocation to stocks, bonds, and money market
SECURITIES MARKET instruments and the percentage of assets invested in
RISK each of the markets available to the adviser.
Investments in foreign markets can be as volatile, if
not more volatile, than investments in U.S. securities
markets. However, a Portfolio that combines both U.S.
and foreign securities may benefit from diversification
and may have volatility less than that of a portfolio
made up solely of foreign securities.
15
<PAGE> 20
To illustrate the volatility of world securities markets
for the U.S. investor, a hypothetical index consisting
60% of the Morgan Stanley Capital International (MSCI)
World Index, 30% of the Salomon Brothers World Bond
Index, and 10% of cash reserves can be used as a proxy
for the Global Balanced Index, the Portfolio's benchmark
index.
This hypothetical index has provided annual total
returns (capital appreciation plus dividend income)
averaging 11.9% for the period 1978 to 1994. The return
in individual years has varied from a low of -9.5% to a
high of 26.9%, which reflects the short-term volatility
of securities prices. The historical total return data
is provided here only as a guide to potential market
risk, and may not be useful for forecasting future
returns in any particular period.
The hypothetical index used as a proxy for the
Portfolio's benchmark index primarily contains return
figures for developed countries; however, the Global
Asset Allocation Portfolio may invest up to 25% of its
holdings in emerging market securities or currencies.
Emerging market countries have periodically provided
greater returns than developed markets, but with
substantially greater volatility. The Portfolio is
likely to differ in terms of portfolio composition from
the hypothetical index, and so the performance of the
Global Asset Allocation Portfolio should not be expected
to mirror the return provided by this hypothetical
index.
FOREIGN MARKET RISK For U.S. investors, the returns of foreign securities
are influenced by not only the returns on foreign
securities themselves, but also by currency
risk -- i.e., changes in the value of currencies in
which the securities are denominated. In a period when
the U.S. dollar generally rises against foreign
currencies, the returns on foreign stocks for a U.S.
investor will be diminished. By contrast, in a period
when the U.S. dollar generally declines, the returns of
foreign securities will be enhanced.
(Please see "SUPPLEMENTAL INVESTMENT POLICIES" for
additional risks associated with investments in foreign
securities.)
MANAGER RISK The Portfolio exposes investors to substantial manager
risk which encompasses the potential for the Portfolio
to fail to achieve its objective due to activities of
the investment adviser. Strategic Investment Management,
the Portfolio's investment adviser, selects stocks based
primarily on quantitative models in an effort to provide
long-term returns that exceed those of comparable
unmanaged indexes. There is no assurance that the stocks
identified by the adviser's quantitative analysis will
enable the Portfolio to meet its stated objective.
- --------------------------------------------------------------------------------
16
<PAGE> 21
GLOBAL EQUITY PORTFOLIO
INVESTMENT The Global Equity Portfolio seeks to provide maximum
OBJECTIVE long-term total return and is therefore intended for
investors who have a long-term investment horizon. To
that end, the Portfolio will assume above-average risk
in seeking potentially above-average returns, although
there is no assurance that the Portfolio will achieve
such returns. Income provided by the Portfolio is
expected to be minimal.
- --------------------------------------------------------------------------------
INVESTMENT The Global Equity Portfolio invests in U.S. and foreign
POLICIES equity securities that the adviser deems attractive. The
Portfolio seeks to diversify its assets among stocks
traded in the major stock markets, as well as emerging
stock markets. The Portfolio seeks to diversify among
foreign markets including Japan, the United Kingdom,
Germany, France, Switzerland, the Netherlands, Sweden,
Australia, and Hong Kong. The Portfolio may also invest
in emerging markets such as Brazil, Indonesia, Korea,
Mexico, the Philippines, Thailand and South Africa.
Emerging markets may be more volatile and less liquid
than more established foreign markets. Under normal
market conditions, the Portfolio will invest at least
65% of its assets in at least three different countries.
The Portfolio will generally limit emerging market
holdings to 20%.
The Portfolio's adviser, Marathon Asset Management
Limited ("Marathon-London") builds portfolios based
primarily upon industry and company analysis rather than
"top down" country allocation decisions. With this
approach, the Portfolio's regional weightings are
expected to range from 50% to 150% of the allocations
exhibited by an unmanaged index such as the Morgan
Stanley Capital International (MSCI) All Country Index.
The relative weightings of individual sectors and stocks
may be expected to differ markedly from index
weightings. This approach can be characterized as
traditional "active" investment management, rather than
a passive indexing approach.
A key element of Marathon-London's analysis is a focus
on competition and industry prospects. This approach
permits the adviser to identify opportunities across a
wide range of industries. As such, the Portfolio will
tend to own a mix of both "value" and "growth" stocks.
Besides investing in equity securities, the Portfolio
may also enter into forward foreign currency exchange
contracts in order to protect its securities from
fluctuations in exchange rates. (See "SUPPLEMENTAL
INVESTMENT POLICIES" for a description of such
contracts.)
- --------------------------------------------------------------------------------
INVESTMENT RISKS The Portfolio exposes investors to the market risks
SECURITIES MARKET associated with world stock markets. International stock
RISK and bond markets have periodically offered above-average
returns relative to U.S. investments. However,
commensurate with that opportunity for greater return
lies greater risk. Risk factors unique to international
investing are the volatility of a country's financial
markets, a country's political and economic climate, and
fluctuations in the value of its currency.
17
<PAGE> 22
Investments in foreign stock markets can be as volatile,
if not more volatile, than investments in U.S. markets.
However, a Portfolio that combines both U.S. and foreign
stocks may benefit from diversification and may have
volatility less than that of a pure foreign stock
portfolio.
The average annual returns of the Morgan Stanley Capital
International (MSCI) World Index can be used as an
indicator of the world market risk of the Global Equity
Portfolio. The world stock index returns have provided
annual total returns (capital appreciation plus dividend
income) averaging 12.7% for the period 1970-1994. The
return in individual years has varied from a low of
-24.5% to a high of 42.8%, which reflects the short-term
volatility of stock prices. The historical total return
data is provided here only as a guide to potential
market risk, and may not be useful for forecasting
future returns in any particular period.
The MSCI World Index primarily contains return figures
for developed countries; whereas, the Portfolio may
invest 20% of its holdings in emerging market
securities. Emerging market countries have periodically
provided greater returns than developed markets, but
with substantially greater volatility. The Portfolio is
likely to differ in terms of portfolio composition from
the MSCI World Index, and so the performance of the
Global Equity Portfolio should not be expected to mirror
the return provided by the Index.
FOREIGN MARKET RISK The Portfolio also exposes investors to foreign market
risk. For U.S. investors, the returns on foreign
securities are influenced by not only the returns on
foreign securities themselves, but also by currency
risk -- i.e., changes in the value of currencies in
which the securities are denominated. In a period when
the U.S. dollar generally rises against foreign
currencies, the returns on foreign stocks for a U.S.
investor will be diminished. By contrast, in a period
when the U.S. dollar generally declines, the returns of
foreign securities will be enhanced.
Please see "SUPPLEMENTAL INVESTMENT POLICIES" for
additional risks associated with investments in foreign
securities.
MANAGER RISK The Portfolio exposes investors to substantial manager
risk which encompasses the potential for the Portfolio
to fail to achieve its objective due to activities of
the investment adviser, Marathon-London. The Portfolio's
investment adviser selects stocks based on investment
judgment and analysis of corporate strategies,
competition, and capital flows. There is no assurance
that the Portfolio will meet its stated objective.
- --------------------------------------------------------------------------------
WHO SHOULD INVEST The Portfolios are designed for investors who have a
LONG-TERM long-term (five years or longer) investment horizon,
INVESTORS SEEKING seek long-term total return and have the perspective,
MAXIMUM TOTAL RETURN patience, and financial resources to assume
above-average risk and volatility for the potential of
achieving above-average return. Investors in the
Portfolios should be able to tolerate sudden, sometimes
18
<PAGE> 23
substantial fluctuations in the value of their
investments. Each Portfolio's share price is expected to
be volatile.
The AGGRESSIVE GROWTH PORTFOLIO is appropriate for
investors who seek to invest in a quantitatively managed
portfolio of diversified U.S. equity securities.
The CAPITAL OPPORTUNITY PORTFOLIO is appropriate for
investors who seek to invest in an actively managed
portfolio of U.S. equity securities and are willing to
accept the risks associated with short selling stocks
and index put options.
The GLOBAL ASSET ALLOCATION PORTFOLIO is appropriate for
investors who seek to invest in an actively managed
portfolio of U.S. and foreign stocks, bonds and cash
reserves and are willing to accept the risks associated
with a high level (up to 50% of the Portfolio's net
assets) of investments in futures contracts.
The GLOBAL EQUITY PORTFOLIO is appropriate for investors
who seek to invest in an actively managed Portfolio of
U.S. and foreign equity securities.
Because of the risks associated with common stock
investments, all four Portfolios are intended to be
long-term investment vehicles and are not designed to
provide investors with a means of speculating on
short-term market movements. Investors who engage in
excessive account activity generate additional costs
which are borne by all of the Fund's shareholders. In
order to minimize such costs, the Fund has adopted the
following policies. The Fund reserves the right to
reject any purchase request (including exchange
purchases from other Vanguard portfolios) that is
reasonably deemed to be disruptive to efficient
portfolio management, either because of the timing of
the investment or previous excessive trading by the
investor. Additionally, the Fund has adopted exchange
privilege limitations as described in the section
entitled "Exchange Privilege Limitations." Finally, the
Fund reserves the right to suspend the offering of its
shares.
The Fund is not intended as a complete investment
program. Most investors should maintain diversified
holdings of securities with different risk
characteristics -- including common stocks, bonds and
money market instruments. Investors may also wish to
complement an investment in the Fund with other types of
investments.
- --------------------------------------------------------------------------------
19
<PAGE> 24
SUPPLEMENTAL The Portfolios of the Fund may invest temporarily in
INVESTMENT certain short-term fixed income securities for defensive
POLICIES purposes. Such securities may be used to invest
EACH PORTFOLIO MAY uncommitted cash balances or to maintain liquidity to
INVEST IN SHORT-TERM meet shareholder redemptions. Although not expected to
FIXED-INCOME do so, each Portfolio may invest up to 100% of its
SECURITIES assets in such securities. These securities include:
obligations of the United States Government and its
agencies or instrumentalities; commercial paper, bank
certificates of deposit, and bankers' acceptances; and
repurchase agreements collateralized by these
securities. Additionally, the Capital Opportunity
Portfolio may invest up to 15% of its net assets in cash
reserves, for temporary defensive purposes, after major
up movements in the prices of the Portfolio's stocks
when the investment adviser is not satisfied with
investment alternatives.
EACH PORTFOLIO MAY Each Portfolio of the Fund may utilize stock futures
INVEST IN DERIVATIVE contracts, options, including puts and calls, warrants,
SECURITIES SUCH AS: convertible securities and swap agreements to a limited
FUTURES CONTRACTS, extent. Each Portfolio may use over-the-counter options
OPTIONS AND WARRANTS when exchange traded options do not exist. Specifically,
AND CONVERTIBLE the Capital Opportunity, Aggressive Growth and Global
SECURITIES Equity Portfolios may enter into futures contracts and
options provided that not more than 5% of their assets
are required as a margin deposit for futures contracts
or options, and provided that not more than 20% of each
Portfolio's assets are invested in futures and options
at any time. Investors in the Global Asset Allocation
Portfolio should be aware the Portfolio's adviser may
invest up to 50% of the Portfolio's net assets in
futures contracts provided that not more than 15% of its
net assets are required for margin requirements. The
Global Asset Allocation Portfolio may purchase options
provided that not more than 5% of its assets are
required as a margin deposit, and provided that not more
than 20% of its net assets are invested in options at
any time. In combination, futures and options will not
exceed 50% of the Portfolio's net assets with not more
than 15% of the Portfolio's net assets required for
margin requirements at any time.
FUTURES CONTRACTS, By investing in such instruments the Portfolio's
OPTIONS, WARRANTS, advisers will expose investors to those risks inherent
CONVERTIBLE SECURITIES in these commonly used strategies. Futures and options
AND SWAP AGREEMENTS are derivative instruments in that their value is
POSE CERTAIN RISKS derived from the value of another security. For example,
due to both the low margin deposits required and the
extremely high degree of leverage involved in futures
pricing, a relatively small price movement in a futures
contract may result in an immediate and substantial loss
or gain. However, the Portfolios will not use futures
contracts, options, warrants, convertible securities and
swap agreements for speculative purposes or to leverage
their net assets. Accordingly the primary risks
associated with the use of futures contracts, options,
including puts and calls, warrants, convertible
securities and swap agreements by a Portfolio are: (i)
imperfect correlation between the change in market value
of the stocks held by the Portfolio and the prices of
futures contracts, options, warrants, convertible
securities and swap agreements; (ii) the risk that
20
<PAGE> 25
the investment adviser will incorrectly predict stock
market and interest rate trends; and (iii) possible lack
of a liquid secondary market for a futures contract and
the resulting inability to close a futures position
prior to its maturity date. The risk of imperfect
correlation will be minimized by investing only in those
contracts whose behavior is expected to resemble that of
the Portfolio's underlying securities. The risk that the
Portfolio will be unable to close out a futures position
will be minimized by entering into such transactions on
an exchange with an active and liquid secondary market.
However, options, warrants, convertible securities and
swap agreements purchased or sold over-the-counter may
be less liquid than exchange traded securities. Please
refer to the "Statement of Additional Information" for
additional information about futures and options.
Additionally, each Portfolio's investments in warrants
will not exceed 15% of its assets. Futures contracts,
options, warrants, convertible securities and swap
agreements may be used for several reasons: to simulate
full investment while retaining a cash balance for fund
management purposes, to facilitate the portfolio
management process, or to reduce transaction costs. The
Portfolios may not use futures and options to leverage
their net assets.
EACH PORTFOLIO MAY Swap agreements are contracts between parties in which
ENTER INTO SWAP one party agrees to make payments to the other party
AGREEMENTS based on the change in market value of a specified index
or asset. In return, the other party agrees to make
payments to the first party based on the return of a
different specified index or asset. Although swap
agreements entail the risk that a party will default on
its payment obligations the Portfolios will minimize
this risk by entering into agreements that mark to
market no less frequently than quarterly. Swap
agreements also bear the risk that the Portfolios will
not be able to meet their obligations to the
counterparty. This risk will be mitigated by having the
Portfolios invest in the specific asset for which they
are obligated to pay a return. Swap agreements are
considered illiquid, and investments in swap agreements
are therefore subject to the 15% limitation on illiquid
securities described in the Statement of Additional
Information.
ALL PORTFOLIOS MAY All Portfolios of the Fund may lend securities to
LEND THEIR SECURITIES qualified institutional investors for either short-term
or long-term periods for the purpose of realizing
additional income. Loans of securities by a Portfolio
will be collateralized by cash, letters of credit, or
securities issued or guaranteed by the U.S. Government
or its agencies. The collateral will equal at least 100%
of the current market value of the loaned securities,
and such loans may not exceed 33 1/3% of the value of
the Portfolio's net assets. The Portfolios may also
invest in repurchase agreements and reverse repurchase
agreements to a limited extent (not more than 5% of
assets). Please refer to the "Statement of Additional
Information" for further details.
21
<PAGE> 26
ALL PORTFOLIOS MAY
OWN RESTRICTED
SECURITIES
All Portfolios of the Fund may own restricted securities
to a limited extent. Restricted securities are
securities which are subject to restrictions upon sale
under the Securities Act of 1933. Each Portfolio may
invest up to 15% of its net assets in restricted
securities. (Included within this limit are restricted
securities and, other securities for which price
quotations are not readily available, as well as OTC
options and swap agreements.) The Fund's Board of
Directors may from time to time determine certain
restricted securities known as Rule 144A securities to
be liquid. Such securities will not be subject to the
15% limitation described above.
THREE OF THE FUND'S
PORTFOLIOS EXPOSE
INVESTORS TO FOREIGN
MARKET RISK The Capital Opportunity, Global Asset Allocation, and
Global Equity Portfolios expose investors to foreign
market risk. Some risks and considerations of
international investing include the following:
differences in accounting, auditing and financial
reporting standards; generally higher commission rates
on foreign portfolio transactions; smaller trading
volumes and generally lower liquidity of foreign stock
markets, which may result in greater price volatility;
foreign withholding taxes payable on the Portfolio's
foreign securities, which may reduce dividend income
payable to shareholders; the possibility of
expropriation or confiscatory taxation; adverse changes
in investment or exchange control regulations;
difficulty in obtaining a judgment from a foreign court;
political instability which could affect U.S. investment
in foreign countries; and potential restrictions on the
flow of international capital.
THE GLOBAL EQUITY AND
GLOBAL ASSET
ALLOCATION PORTFOLIOS
MAY ENTER INTO
FORWARD CURRENCY
CONTRACTS The Global Equity and Global Asset Allocation Portfolios
may enter into forward foreign currency exchange
contracts. Such contracts are used to protect the
Portfolio's securities against uncertainty in the level
of future foreign exchange rates. Under normal
circumstances, the Global Equity Portfolio will not
commit more than 20% of its assets to such contracts.
The Global Asset Allocation Portfolio will normally
invest approximately 30% of its assets in forward
foreign currency exchange contracts. The Portfolio will
utilize such contracts in conjunction with equity
futures in order to achieve index-like exposure. The
Portfolio may also utilize such contracts to hedge
positions in foreign bonds or cash reserves without
limitation.
A forward foreign currency exchange contract is an
obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at
a price set at the time of the contract. The contracts
may be bought or sold to protect the Portfolios, to a
limited extent, against adverse changes in exchange
rates between foreign currencies and the U.S. dollar.
Such contracts, which protect the value of a Portfolio's
investment securities against a decline in the value of
a currency, do not eliminate fluctuations in the
underlying prices of the securities. They simply
establish an exchange rate at a future date. Also,
although such contracts tend to minimize the risk of
loss due to a decline in the value of a hedged currency,
at the same time they tend to limit any potential gain
that might be realized should the value of such currency
increase.
22
<PAGE> 27
PORTFOLIO TURNOVER Although all Portfolios of the Fund seek to invest for
the long term, they retain the right to sell securities
irrespective of how long they have been held. The annual
portfolio turnover expected for each Portfolio is
provided in the table below.
<TABLE>
<CAPTION>
ESTIMATED
ANNUAL
PORTFOLIO TURNOVER
--------- -----------
<S> <C>
Aggressive Growth Portfolio 100-150%
Capital Opportunity Portfolio 75-125%
Global Asset Allocation 100-200%
Global Equity Portfolio 10-50%
</TABLE>
A turnover rate of 100% would occur, for example, if all
the securities of a Portfolio were replaced within one
year. Higher portfolio turnover rates generally result
in increased brokerage commissions and the realization
of higher capital gains, which may make these Portfolios
more attractive for the tax-deferred portion of an
investment portfolio. Each Portfolio is managed without
regard to tax ramifications.
- --------------------------------------------------------------------------------
INVESTMENT Each Portfolio has adopted certain limitations designed
LIMITATIONS to reduce its exposure to specific situations. Some of
these limitations are that a Portfolio will not:
THE FUND HAS ADOPTED
CERTAIN FUNDAMENTAL (a) with respect to 75% of the value of its total
LIMITATIONS assets, invest more than 5% of its assets in the
securities of any single issuer (other than
obligations issued or guaranteed as to principal and
interest by the U.S. Government, its agencies or
instrumentalities);
(b) with respect to 75% of the value of its total
assets, purchase more than 10% of the voting
securities of any issuer;
(c) invest more than 25% of its assets in any one
industry; and
(d) borrow money except from banks for temporary or
emergency purposes, and in no event in excess of 15%
of the market value of its total assets.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional
Information are fundamental, and may only be changed
with the approval of a majority of a Portfolio's
shareholders.
- --------------------------------------------------------------------------------
MANAGEMENT The Fund is a member of The Vanguard Group of Investment
OF THE FUND Companies, a family of more than 30 investment companies
with more than 80 distinct portfolios and total assets
VANGUARD in excess of $150 billion. Through their jointly-owned
ADMINISTERS subsidiary, The Vanguard Group, Inc. ("Vanguard"), the
AND DISTRIBUTES Fund and the other funds in the Group obtain at cost
THE FUND virtually all of their corporate management,
administrative and distribution services. Vanguard also
provides investment advisory services on an at-cost
basis to certain funds. As a result of Vanguard's unique
corporate structure, the Vanguard funds have costs
substantially lower than those of most competing mutual
funds. In 1994, the average expense ratio (annual costs
including advisory fees divided by total net assets)
for the
23
<PAGE> 28
Vanguard funds amounted to approximately .30% compared
to an average of 1.05% for the mutual fund industry
(data provided by Lipper Analytical Services).
The Officers of the Fund manage its day-to-day
operations and are responsible to the Fund's Board of
Directors. The Directors set broad policies for the Fund
and chose its Officers. A list of the Directors and
Officers of the Fund and a statement of their present
positions and principal occupations during the past five
years can be found in the Statement of Additional
Information.
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite
services to the funds and provides the funds with
necessary office space, furnishings and equipment.
Each Fund pays its share of Vanguard's total expenses,
which are allocated among the funds under methods
approved by the Board of Directors (Trustees) of each
fund. In addition, each fund bears its own direct
expenses, such as legal, auditing and custodial fees.
Vanguard provides distribution and marketing services to
the funds. The funds are available on a no-load basis,
(i.e., there are no sales commissions or 12b-1 fees).
However, each fund bears its allocated share of the
Group's distribution costs.
- --------------------------------------------------------------------------------
INVESTMENT The AGGRESSIVE GROWTH PORTFOLIO receives investment
ADVISERS advisory services from VANGUARD'S CORE MANAGEMENT GROUP.
VANGUARD SERVES The Core Management Group also provides investment
AS ADVISER TO THE advisory services to several other Vanguard Funds,
AGGRESSIVE GROWTH including Vanguard Index Trust, Vanguard International
PORTFOLIO Equity Index Fund, Vanguard Institutional Index Fund,
Vanguard Balanced Index Fund, the Equity Index Portfolio
of the Vanguard Variable Insurance Fund, the Growth and
Income and Capital Appreciation Portfolios and the
equity portion of the Balanced Portfolio of Vanguard
Tax-Managed Fund, and a portion of Vanguard/Windsor II
and Vanguard/ Morgan Growth Fund, as well as to several
indexed separate accounts. Total assets under management
by the Core Management Group were $18 billion as of
December 31, 1994. The Core Management Group is
supervised by the Officers of the Fund. George U.
Sauter, Vice President of the Core Management Group and
the portfolio manager of each of the Funds managed by
the Core Management Group, has served in this capacity
for each of the Vanguard Funds advised by the Group
since 1987, and utilizes a team approach to manage the
Portfolio's assets.
Vanguard's Core Management Group will provide advisory
services on an at-cost basis. In placing portfolio
transactions, Vanguard's Core Management Group uses its
best judgment to choose the broker most capable of
providing the brokerage services necessary to obtain the
best available price and most favorable execution at the
lowest commission rate. The full range and quality of
brokerage services available are considered in making
these determinations. In selecting broker-dealers
24
<PAGE> 29
to execute securities transactions for the Portfolio,
consideration will be given to such factors as: the
price of the security; the rate of the commission; the
size and difficulty of the order; the reliability,
integrity, financial condition, general execution, and
operational capabilities of competing brokers-dealers;
and the brokerage and research services provided to the
Portfolio. In those instances where it is reasonably
determined that more than one broker can offer the
services needed to obtain the best available price and
most favorable execution, consideration may be given to
those brokers which supply statistical information and
provide other services in addition to execution services
to the Portfolio.
HUSIC CAPITAL The CAPITAL OPPORTUNITY PORTFOLIO is managed by HUSIC
MANAGEMENT SERVES CAPITAL MANAGEMENT ("Husic"), 555 California Street,
AS ADVISER TO THE Suite 2900, San Francisco, California 94104. Husic
CAPITAL OPPORTUNITY provides asset management services to companies,
PORTFOLIO institutions, and individuals as well as approximately
13% of the Vanguard Morgan Growth Fund. As of December
31, 1994 Husic had over $2.3 billion in assets under
management.
Frank J. Husic, Managing Partner of Husic Capital
Management, serves as portfolio manager for the Capital
Opportunity Portfolio. Mr. Husic has been the managing
partner of Husic since its founding in June 1986.
Previously, he was Senior Vice President and Director of
Alliance Capital Management as well as President and
Portfolio Manager of the Alliance Technology and
Alliance International Technology Funds.
For the services provided by Husic under the investment
advisory agreement the Portfolio will pay Husic a basic
fee at the end of each fiscal quarter, calculated by
applying a quarterly rate based on the following annual
percentage rates, to the average month-end net assets of
the Capital Opportunity Portfolio for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
--------------------- ----
<S> <C>
First $100 million .40%
Next $200 million .35%
Next $300 million .25%
Next $400 million .20%
Over $1 billion .15%
</TABLE>
Effective with the quarter ending October 31, 1996, the
basic advisory fee may be increased or decreased by
applying an adjustment formula based on the investment
performance of the Capital Opportunity Portfolio
relative to the Capital Opportunity Fund Stock Index, an
index of the equity holdings of the 60 largest
aggressive growth stock mutual funds.
25
<PAGE> 30
The following table sets forth the incentive/penalty
adjustment to the basic advisory fee payable by the
Portfolio to Husic.
<TABLE>
<CAPTION>
ANNUAL NET
PERFORMANCE
DIFFERENCE RELATIVE TOTAL FEE AS A PERCENTAGE OF
TO BENCHMARK BASE FEE
-------------------- ----------------------------
<S> <C>
Less than -12% 25.0%
-12% to -6% 50.0%
-6% to +6% 100.0%
+6% to +12% 150.0%
More than +12% 175.0%
</TABLE>
Under the rules of the Security and Exchange Commission,
the incentive/penalty fee structure will not be fully
operable until the quarter ending October 31, 1998, and,
until that date, will be calculated according to certain
transition rules. See the Statement of Additional
Information for a detailed description of the
incentive/penalty fee schedule for Husic and the
applicable transition rules.
STRATEGIC INVESTMENT The GLOBAL ASSET ALLOCATION PORTFOLIO is managed by
MANAGEMENT STRATEGIC INVESTMENT MANAGEMENT ("SIM"), 1001 19th
SERVES AS ADVISER TO Street North, 16th Floor, Arlington, Virginia 22209.
THE GLOBAL ASSET Strategic Investment Management provides asset
ALLOCATION PORTFOLIO management services to companies, institutions, and
individuals. As of January 17, 1995, SIM (and its
affiliated companies) had over $15 billion in assets
under management.
Michael J. Duffy, Managing Director of Strategic
Investment Management, serves as portfolio manager for
the Global Asset Allocation Portfolio. Mr. Duffy has
been a Managing Director of SIM since 1987. Previously,
he was a Senior Pension Investment Officer for the World
Bank as well as an Economist for the Board of Governors
of the Federal Reserve System.
For the services provided by Strategic Investment
Management under the investment advisory agreement the
Portfolio will pay Strategic Investment Management a
basic fee at the end of each fiscal quarter, calculated
by applying a quarterly rate based on the following
annual percentage rates, to the average month-end net
assets of the Global Asset Allocation Portfolio for the
quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
--------------------- ----
<S> <C>
First $250 million .40%
Next $250 million .35%
Next $500 million .25%
Over $1 billion .20%
</TABLE>
26
<PAGE> 31
Effective with the quarter ending October 31, 1996, the
basic advisory fee may be increased or decreased by
applying an adjustment formula based on the investment
performance of the Global Asset Allocation Portfolio
relative to the theoretical Global Balanced Index which
is calculated as follows:
<TABLE>
<S> <C>
60% global stock investments
30% global bond investments
10% U.S. cash reserve investments
</TABLE>
The 60% global stock component is an adjusted
capitalization-weighted average of the established local
stock market index in each country. The 30% global bond
component is a capitalization-weighted average of the
country indices of the Salomon Brothers World Government
Bond Index. The U.S. cash reserve component is the bond
equivalent yield of the Federal Reserve's published
average offering rate on 30-day commercial paper. The
index is adjusted to reduce the exposure of foreign
currency fluctuations by hedging back into U.S. dollars
one half of the foreign currency exposure resulting from
equity holdings and all of the foreign currency exposure
resulting from the bond holdings. The countries included
in this index will be the U.S., Canada, the United
Kingdom, France, Germany, Spain, Japan, Australia and
Hong Kong (there will be no bond investments in Hong
Kong). The Global Balanced Index will be reviewed
semiannually and with approval of the Fund's Officers
may be changed to reflect additions or deletions of
countries from the advisors mandate going forward.
The following table sets forth the incentive/penalty
adjustment to the basic advisory fee payable by the
Portfolio to Strategic Investment Management.
<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH TOTAL FEE AS A
PERFORMANCE VS. THE GLOBAL PERCENTAGE OF
BALANCED INDEX BASE FEE*
------------------------------------- -----------------------
<S> <C>
Less than -0.75% -0.75 X Base Fee
-0.75% to +2.25% -0.50 X Base Fee
Between +2.25% and +5.25% -0.25 X Base Fee
Between +5.25% and +8.25% Base Fee
Between +8.25% and +11.25% 0.25 X Base Fee
Between +11.25% and +14.25% 0.50 X Base Fee
Over +14.25% 0.75 X Base Fee
* For purposes of this calculation, the Base Fee represents the
annual rate used in calculating the base advisory fee
multiplied by the average assets for the performance period
measured to calculate the incentive/penalty adjustment.
</TABLE>
Under the rules of the Security and Exchange Commission,
the incentive/penalty fee structure will not be fully
operable until the quarter ending October 31, 1998, and,
until that date, will be calculated according to certain
transition rules. See the Statement of Additional
27
<PAGE> 32
Information for a detailed description of the
incentive/penalty fee schedule for SIM and the
applicable transition rules.
MARATHON-LONDON The GLOBAL EQUITY PORTFOLIO is managed by Marathon Asset
SERVES AS ADVISER Management Limited ("Marathon-London"), 115 Shaftesbury
TO THE GLOBAL Avenue, London. Marathon-London was founded in 1986 and
EQUITY PORTFOLIO provides asset management services to companies,
institutions, and individuals. As of February 3, 1995,
Marathon-London had more than $2.3 billion in assets
under management.
The investment philosophy of Marathon-London is that the
best investment returns for equity portfolios are
primarily the result of careful, thoughtful industry and
company evaluation rather than "top down" country
allocation decisions. Marathon-London's portfolios
therefore tend to exhibit regional weightings within a
range of 50% to 150% of the allocation exhibited in
broad market benchmarks, such as the unmanaged All
Country Index. Sector and stock weightings may be
expected to differ markedly from index weightings. The
firm uses a team approach with each of the firm's three
partners having the primary responsibility for a
specific region, e.g. Europe.
Jeremy J. Hosking, Director of Marathon-London, serves
as portfolio manager for the Global Equity Portfolio.
Mr. Hosking has been a Director of Marathon-London since
its founding in 1986. Previously, he was Director of
G.T. Capital Management, Inc., San Francisco with
responsibility for U.S. portfolio management and
international ERISA asset allocation. From 1981 to 1984
Mr. Hosking managed the GT ASEAN Fund and from 1979 to
1984 he co-managed the GT Far East General Fund.
The Global Equity Portfolio pays Marathon-London a basic
fee at the end of each fiscal quarter, calculated by
applying a quarterly rate, based on the following annual
percentage rates, to the average month-end assets of the
Portfolio for the quarter:
<TABLE>
<CAPTION>
ANNUAL
NET ASSETS RATE
--------------------- ------
<S> <C>
First $100 million 0.45%
Next $150 million 0.40%
Next $250 million 0.25%
</TABLE>
Effective with the quarter ending October 31, 1996, the
basic advisory fee may be increased or decreased by
applying an adjustment formula based on the investment
performance of the Portfolio relative to the Morgan
Stanley Capital International (MSCI) All Country Index
as adjusted. The following table sets forth the
incentive/penalty adjustment to the basic advisory fee
payable by the Portfolio to Marathon-London
28
<PAGE> 33
under the investment advisory agreement. The adjustments
to the fee change proportionately with performance
relative to the Index.
<TABLE>
<CAPTION>
CUMULATIVE NET 36-MONTH PERFORMANCE TOTAL FEE AS A
DIFFERENTIAL VS. THE MSCI PERCENTAGE OF
ALL COUNTRY INDEX BASE FEE
-------------------------------------- ------------------------
<S> <C>
Less than 3% 50%
Between 3% and 6% 75%
Between 6% and 9% 100%
Between 9% and 12% 125%
More than 12% 150%
</TABLE>
Under rules of the Securities and Exchange Commission,
the incentive/penalty fee adjustment will not be fully
operable until the quarter ending October 31, 1998, and
until that date, will be calculated according to certain
transition rules. A detailed description of the
incentive/penalty fee adjustment schedule for
Marathon-London and the applicable transition rules is
contained in the Statement of Additional Information.
The Fund has authorized Husic Capital Management,
Strategic Investment Management, and Marathon-London to
pay higher commissions in recognition of brokerage
services felt necessary for the achievement of better
execution, provided the investment adviser believes this
to be in the best interest of the Portfolio for which it
is responsible. Although the Portfolios do not market
their shares through intermediary brokers or dealers,
the Portfolios may place orders with qualified
broker-dealers who recommend the Portfolio to clients,
if the Officers of the Fund believe that the quality of
the transaction and the commission are comparable to
what they would be with other qualified brokerage firms.
The Fund's Board of Directors may, without the approval
of shareholders, provide for: (a) the employment of a
new investment adviser pursuant to the terms of a new
advisory agreement either as a replacement for an
existing adviser or as an additional adviser; (b) a
change in the terms of an advisory agreement; and (c)
the continued employment of an existing adviser on the
same advisory contract terms where a contract has been
assigned because of a change in control of the adviser.
Any such change will only be made upon not less than 30
days' prior written notice to shareholders of the Fund
which shall include substantially the information
concerning the adviser that would have normally been
included in a proxy statement. In the event that such
notice is given, the 1% redemption fee will be waived
for a period of 90 days.
- --------------------------------------------------------------------------------
DIVIDENDS, CAPITAL The Portfolios of the Fund are expected to pay dividends
GAINS AND TAXES annually from ordinary income. Net capital gains
distributions, if any, will also be made annually. In
addition, to satisfy certain distribution requirements
of the Tax Reform Act of 1986, the Fund may declare
special year-end dividend and capital gains
distributions during the month of December. Such
distributions, if received by shareholders by January
31, are
29
<PAGE> 34
deemed to have been paid by the Fund and received by
shareholders on December 31 of the prior year.
Dividends and capital gains distributions may be
automatically reinvested or received in cash. See
"Choosing a Distribution Option" for a description of
these options.
The Fund intends to qualify for taxation as a "regulated
investment company" under the Internal Revenue Code so
that it will not be subject to federal income tax to the
extent its income is distributed to shareholders.
Dividends paid by the Fund from net investment income,
whether received in cash or reinvested in additional
shares, will be taxable to shareholders as ordinary
income.
For corporate investors, dividends from net investment
income will generally qualify in part for the
intercorporate dividends-received deduction. However,
the portion of the dividends so qualified depends on the
aggregate taxable qualifying dividend income received by
the Fund from domestic (U.S.) sources.
Distributions paid by the Fund from long-term capital
gains, whether received in cash or reinvested in
additional shares, are taxable as long-term capital
gains, regardless of the length of time you have owned
shares in the Fund. Capital gains distributions are made
when the Fund realizes net capital gains on sales of
portfolio securities during the year. The Fund does not
seek to realize any particular amount of capital gains
during a year; rather, realized gains are a by-product
of portfolio management activities. Consequently,
capital gains distributions may be expected to vary
considerably from year to year; there will be no capital
gains distributions in years when the Fund realizes net
capital losses.
Note that if you elect to receive capital gains
distributions in cash, instead of reinvesting them in
additional shares, you are in effect reducing the
capital at work for you in the Fund. Also, keep in mind
that if you purchase shares in the Fund shortly before
the record date for a dividend or capital gains
distribution, a portion of your investment will be
returned to you as a taxable distribution, regardless of
whether you are reinvesting your distributions or
receiving them in cash.
The Fund will notify you annually as to the tax status
of its dividend and capital gains distribution.
THE GLOBAL ASSET The Global Asset Allocation and Global Equity Portfolios
ALLOCATION AND may elect to "pass through" to the Portfolios'
GLOBAL EQUITY shareholders the amount of foreign income taxes paid by
PORTFOLIOS MAY the Portfolio(s). The Portfolio(s) will make such an
"PASS THROUGH" election only if it deems it to be in the best interests
FOREIGN TAXES of its shareholders.
If this election is made, shareholders of the
Portfolio(s) will be required to include in their gross
income their pro rata share of foreign taxes paid by the
Portfolio. However, shareholders will be able to treat
their pro rata share of foreign taxes as either an
itemized deduction or a foreign tax credit against U.S.
income taxes (but not both) on their tax return.
30
<PAGE> 35
A CAPITAL GAIN OR A sale of shares of the Fund is a taxable event and may
LOSS MAY BE REALIZED result in a capital gain or loss. A capital gain or loss
UPON EXCHANGE OR may be realized from an ordinary redemption of shares or
REDEMPTION an exchange of shares between two mutual funds (or two
portfolios of a mutual fund).
Dividend distributions, capital gains distributions, and
capital gains or losses from redemptions and exchanges
may be subject to state and local taxes.
The Fund is required to withhold 31% of taxable
dividends, capital gains distributions, and redemptions
paid to shareholders who have not complied with IRS
taxpayer identification regulations. You may avoid this
withholding requirement by certifying on your Account
Registration Form your proper Social Security or
Employer Identification number and by certifying that
you are not subject to backup withholding.
The Fund has obtained a Certificate of Authority to do
business as a foreign corporation in Pennsylvania and
does business and maintains an office in that state. In
the opinion of counsel, the shares of the Fund are
exempt from Pennsylvania personal property taxes.
The tax discussion set forth on the previous page is
included for general information only. Prospective
investors should consult their own tax advisers
concerning the tax consequences of an investment in the
Fund. The Fund is managed without regard to tax
ramifications.
- --------------------------------------------------------------------------------
THE SHARE PRICE Each Portfolio's share price or "net asset value" per
OF EACH PORTFOLIO share is determined by dividing the total assets of the
Portfolio, less all liabilities, by the total number of
shares outstanding. The net asset value is calculated at
the close of regular trading (generally 4:00 p.m.
Eastern time) each day the New York Stock Exchange is
open for trading.
Market values for securities listed on an exchange are
based upon the latest quoted sales price as of 4:00 p.m.
Eastern time on the valuation date. Securities not
traded on the valuation date are valued at the mean of
the latest quoted bid and ask price. Securities not
listed on an exchange are valued at the latest quoted
bid price. Temporary cash investments are valued at
cost, plus or minus any amortized discount or premium,
which approximates market value. All prices of listed
securities are taken from the exchange where the
security is primarily traded. Securities may be valued
on the basis of prices provided by a pricing service
when such prices are believed to reflect the fair market
value of such securities. Securities for which market
quotations are not readily available or which are
restricted as to sale and other assets are valued by
such methods as the Board of Directors deems in good
faith to reflect fair value.
All foreign securities are valued at the latest quoted
sales price available before the time when assets are
valued. Securities listed on a foreign exchange, as well
as American Depository Receipts ("ADRs"), which are
traded on U.S. exchanges are valued at the latest quoted
sales price
31
<PAGE> 36
available before the time when assets are valued.
Securities regularly traded in the over-the-counter
market for which market quotations are readily available
will be valued at the latest quoted bid price.
For purposes of determining the Portfolios' net asset
value per share, all assets and liabilities, initially
expressed in foreign currencies, will be translated into
U.S. dollars at the bid prices of such currencies,
against U.S. dollars invested by major banks as of 4:00
p.m. London time. If such quotations are not available
the rate of exchange will be determined in accordance
with policies established in good faith by the Board of
Directors.
The Fund's price per share can be found daily in the
mutual fund section of most major newspapers under the
heading of The Vanguard Group.
- --------------------------------------------------------------------------------
GENERAL Vanguard Horizon Fund, Inc. is a Maryland Corporation.
INFORMATION
The authorized capital stock of the Fund consists of
1,000,000,000 shares at the par value of $.001 each. The
Board of Directors has the power to designate one or
more classes ("Portfolios") of shares of common stock
and to classify or reclassify any unissued shares with
respect to such Portfolios. Currently the Fund is
offering four classes of shares.
Annual meetings of shareholders will not be held except
as required by the Investment Company Act of 1940 and
other applicable law. An annual meeting will be held to
vote on the removal of a Director or Directors of the
Fund if requested in writing by the holders of not less
than 10% of the Fund.
The shares of the Funds are fully paid and
nonassessable; have no preferences as to conversion,
exchange, dividends, retirement or other features; and
have no preemptive rights. Such shares have
noncumulative voting rights, meaning that the holders of
more than 50% of the shares voting for the election of
Directors can elect 100% of the Directors if they so
choose.
All securities and cash are held for the Aggressive
Growth and Capital Opportunity Portfolios by State
Street Bank. For the Global Asset Allocation and Global
Equity Portfolios all securities and cash are held by
Morgan Stanley Trust Company. The Vanguard Group, Inc.,
Valley Forge, PA, serves as the Fund's Transfer and
Dividend Disbursing Agent. Price Waterhouse LLP serves
as independent accountants for the Fund and audits its
financial statements annually. The Fund is not involved
in any litigation.
- --------------------------------------------------------------------------------
32
<PAGE> 37
SHAREHOLDER GUIDE
OPENING AN You may open a regular (non-retirement) account, either
ACCOUNT AND by mail or wire. Simply complete and return an Account
PURCHASING Registration Form and any required legal documentation,
SHARES indicating the amount you wish to invest. Your purchase
must be equal to or greater than the $3,000 minimum
initial investment requirement ($500 for Uniform
Gifts/Transfers to Minors Act accounts). You must open a
new Individual Retirement Account by mail (IRAs may not
be opened by wire) using a Vanguard IRA Adoption
Agreement. Your purchase must be equal to or greater
than the $500 minimum initial investment requirement,
but no more than $2,000 if you are making a regular IRA
contribution. Rollover contributions are generally
limited to the amount withdrawn within the past 60 days
from an IRA or other qualified Retirement Plan. If you
need assistance with the forms or have any questions
about this Fund, please call our Investor Information
Department at 1-800-662-7447. NOTE: For other types of
account registrations (e.g., corporations, associations,
other organizations, trusts or powers of attorney),
please call us to determine which additional forms you
may need.
Because of the risks associated with common stock
investments, the Fund is intended to be a long-term
investment vehicle and is not designed to provide
investors with a means of speculating on short-term
stock market movements. Consequently the Fund reserves
the right to reject any specific purchase (and exchange
purchase) request. The Fund also reserves the right to
suspend the offering of shares for a period of time.
The Portfolios' shares are purchased at the
next-determined net asset value after your investment
has been received. The Fund is offered on a no-load
basis (i.e., there are no sales commissions or 12b-1
fees).
IMPORTANT NOTE: Potential investors should note that a 1% redemption fee
1% REDEMPTION FEE is charged for the Portfolios. This fee, which is paid
directly to the Portfolios, applies to redemptions from
and exchanges from the Portfolios of shares held for
less than 5 years. In the event of an early redemption
due to a shareholder's death, all redemption fees will
be waived. In order to substantiate the death, a
certified copy of the death certificate must be
provided. Please see "Fund Expenses" for more
information.
ADDITIONAL Subsequent investments to regular accounts may be made
INVESTMENTS by mail ($100 minimum), wire ($1,000 minimum), exchange
from another Vanguard Fund account, or Vanguard Fund
Express. Subsequent investments to Individual Retirement
Accounts may be made by mail ($100 minimum) or exchange
from another Vanguard Fund Account. In some instances,
contributions may be made by wire or Vanguard Fund
Express. Please call us for more information on these
topics.
- --------------------------------------------------------------------------------
33
<PAGE> 38
<TABLE>
<S> <C> <C>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount of ADDITIONAL INVESTMENTS SHOULD
your initial investment on INCLUDE THE INVEST-BY-MAIL
Complete and sign the the registration form, make REMITTANCE FORM ATTACHED TO
enclosed Account your check payable to The YOUR FUND CONFIRMATION
Registration Form Vanguard Group -- (Portfolio STATEMENTS. PLEASE MAKE YOUR
Number) (see below for the CHECK PAYABLE TO The Vanguard
appropriate Portfolio Group -- (Portfolio Number)
number), and mail to: (see below for the
appropriate Portfolio num-
VANGUARD FINANCIAL CENTER ber), write your account
P.O. BOX 2600 number on your check and,
VALLEY FORGE, PA 19482 using the return envelope
provided, mail to the address
indicated on the
Invest-by-Mail Form.
For express or VANGUARD FINANCIAL CENTER All written requests should
registered mail, 455 DEVON PARK DRIVE be mailed to one of the
send to: WAYNE, PA 19087 addresses indicated for new
accounts. Do not send
registered or express mail to
the post office box address.
</TABLE>
VANGUARD HORIZON FUND PORTFOLIO NUMBERS
Aggressive Growth Portfolio -- 114
Capital Opportunity Portfolio -- 111
Global Asset Allocation Portfolio -- 115
Global Equity Portfolio -- 129
--------------------------------------------------------
PURCHASING BY WIRE CORESTATES BANK, N.A.
AB 031000011
Money should be CORESTATES NO. 01019897
wired to: ATTN. VANGUARD
VANGUARD HORIZON FUND
BEFORE WIRING ACCOUNT NUMBER
ACCOUNT REGISTRATION
Please contact
Client Services You should notify our Client Services Department of your
(1-800-662-2739) intended wire purchase, including the federal wire
number to be used, by 12:00 noon (Eastern Time).
To assure proper receipt, please be sure your bank
includes the name(s) of the Portfolio(s) selected, the
account number Vanguard has assigned to you and the
eight digit CoreStates number. If you are opening a new
account, please complete the Account Registration Form
and mail it to the "New Account" address above after
completing your wire arrangement. NOTE: Federal Funds
wire purchase orders will be accepted only when the Fund
and Custodian Bank are open for business.
--------------------------------------------------------
34
<PAGE> 39
PURCHASING BY You may open a new account or purchase additional shares
EXCHANGE (from a by making an exchange from an existing Vanguard account.
Vanguard Account) However, the Fund reserves the right to refuse any
exchange purchase request. Call our Client Services
Department (1-800-662-2739) for assistance. The new
account will have the same registration as the existing
account.
--------------------------------------------------------
PURCHASING BY The Fund Express Special Purchase option lets you move
FUND EXPRESS money from your bank account to your Vanguard account on
an "as needed" basis. Or if you choose the Automatic
Special Purchase and Investment option, money will be moved automatically
Automatic Investment from your bank account to your Vanguard account on the
schedule (monthly, bimonthly [every other month],
quarterly or yearly) you select. To establish these Fund
Express options, please provide the appropriate
information on the Account Registration Form. We will
send you a confirmation of your Fund Express service;
please wait three weeks before using the service.
- --------------------------------------------------------------------------------
CHOOSING A You must select one of three distribution options:
DISTRIBUTION
OPTION 1. AUTOMATIC REINVESTMENT OPTION -- Both dividends and
capital gains distributions will be reinvested in
additional Portfolio shares. This option will be
selected for you automatically unless you specify one
of the other options.
2. CASH DIVIDEND OPTION -- Your dividends will be paid
in cash and your capital gains will be reinvested in
additional Portfolio shares.
3. ALL CASH OPTION -- Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client
Services Department (1-800-662-2739).
In addition, an option to invest your cash dividends
and/or capital gains distributions in another Vanguard
Fund account is available. Please call our Client
Services Department (1-800-662-2739) for information.
You may also elect Vanguard Dividend Express which
allows you to transfer your cash dividends and/or
capital gains distributions automatically to your bank
account. Please see "Other Vanguard Services" for more
information.
- --------------------------------------------------------------------------------
TAX CAUTION Under Federal tax laws, the Fund is required to
distribute net capital gains and dividend income to
INVESTORS SHOULD ASK Portfolio shareholders. These distributions are made to
ABOUT THE TIMING OF all shareholders who own Portfolio shares as of the
CAPITAL GAINS AND distribution's record date, regardless of how long the
DIVIDEND DISTRIBUTIONS shares have been owned. Purchasing shares just prior to
BEFORE INVESTING the record date could have a significant impact on your
tax liability for the year. For example, if you purchase
shares immediately prior to the record date of a sizable
capital gain or income dividend distribution, you will
be assessed taxes on the amount of the capital gain
and/or dividend distribution later paid even though you
owned the Portfolio shares for just a short period of
time. (Taxes are due on the distributions even if the
dividend or gain is
35
<PAGE> 40
reinvested in additional Portfolio shares.) While the
total value of your investment will be the same after
the distribution -- the amount of the distribution will
offset the drop in the net asset value of the shares --
you should be aware of the tax implications that the
timing of your purchase may have.
Prospective investors should, therefore, inquire about
potential distributions before investing. The Fund's
annual capital gains distribution normally occurs in
December, while dividends are generally paid annually in
December for the Aggressive Growth, Capital Opportunity,
Global Asset Allocation and Global Equity Portfolios.
For additional information on distributions and taxes,
see the section entitled "Dividends, Capital Gains and
Taxes."
- --------------------------------------------------------------------------------
IMPORTANT The easiest way to establish optional Vanguard services
ACCOUNT on your account is to select the options you desire when
INFORMATION you complete your Account Registration Form. If you wish
to establish additional shareholder options for your
OPTIONAL SERVICES account at a later date, you may need to provide
Vanguard with additional information and a signature
guarantee. Please call our Client Services Department
(1-800-662-2739) for further assistance.
SIGNATURE For our mutual protection, we may require a signature
GUARANTEES guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature and may be obtained from banks, brokers and
any other guarantor that Vanguard deems acceptable. A
SIGNATURE GUARANTEE CANNOT BE PROVIDED BY A NOTARY
PUBLIC.
CERTIFICATES Share certificates will not be available for the Fund.
BROKER/DEALER If you purchase shares in Vanguard Funds through a
PURCHASES registered broker-dealer or investment adviser, the
broker-dealer or adviser may charge a service fee.
CANCELING TRADES The Fund will not cancel any trade (e.g., purchase,
redemption or exchange) believed to be authentic,
received in writing or by telephone, once the trade
request has been received.
ELECTRONIC If you would prefer to receive a prospectus for the Fund
PROSPECTUS or any of the Vanguard Funds in an electronic format,
DELIVERY please call 1-800-231-7870 for additional information.
If you elect to do so, you may also receive a paper copy
of the prospectus, by calling 1-800-662-7447.
- --------------------------------------------------------------------------------
WHEN YOUR Your Trade Date is the date on which your account is
ACCOUNT WILL credited. If your purchase is made by check, Federal
BE CREDITED Funds wire, or exchange, and is received by the regular
close of the New York Stock Exchange (generally 4:00
p.m. Eastern time), your trade date is the day of
receipt. If your purchase is received after the close of
the Exchange, your trade date is the next business day.
Your shares are purchased at the net asset value
determined on your trade date. Vanguard will not accept
third-party
36
<PAGE> 41
checks to open an account. Please be sure your purchase
check is made payable to the Vanguard Group.
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, Vanguard will only
accept a foreign check which has been drawn in U.S.
dollars and has been issued by a foreign bank with a
U.S. correspondent bank. The name of the U.S.
correspondent bank must be printed on the face of the
foreign check.
- --------------------------------------------------------------------------------
SELLING YOUR You may withdraw any portion of the funds in your
SHARES account by redeeming shares at any time (see "Important
Redemption Information"). You may initiate a request by
writing or by telephoning. Your redemption proceeds are
normally mailed within two business days after the
receipt of the request in Good Order.
IMPORTANT NOTE: For investors in the Fund, a redemption
fee equaling 1% of the value of the shares redeemed will
be deducted from the redemption proceeds if shares held
for less than 5 years are redeemed. This fee is paid
directly to the Portfolio.
SELLING BY MAIL Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD HORIZON FUND, P.O. BOX 1120, VALLEY FORGE, PA
19482. (For express or registered mail, send your
request to Vanguard Financial Center, Vanguard Horizon
Fund, 455 Devon Park Drive, Wayne, PA 19087.)
The redemption price of shares will be the Fund's net
asset value next determined after Vanguard has received
all required documents in Good Order.
--------------------------------------------------------
DEFINITION OF GOOD ORDER means that the request includes the
GOOD ORDER following:
1. The account number and Portfolio name.
2. The amount of the transaction (specified in dollars
or shares).
3. Signatures of all owners EXACTLY as they are
registered on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be
required in the case of estates, corporations,
trusts, and certain other accounts.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT
PERTAINS TO YOUR REQUEST, PLEASE CALL OUR CLIENT
SERVICES DEPARTMENT AT 1-800-662-2739.
--------------------------------------------------------
SELLING BY To sell shares by telephone, you or your pre-authorized
TELEPHONE representative may call our Client Services Department
at 1-800-662-2739. The proceeds will be sent to you by
mail. Please see "Important Information About Telephone
Transactions."
--------------------------------------------------------
SELLING BY FUND If you select the Fund Express Automatic Withdrawal
EXPRESS option, money will be automatically moved from your
Vanguard Fund account to your bank account according to
Automatic Withdrawal the schedule you have selected. The Special Redemption
& Special Redemption option lets you move money from your Vanguard account to
your bank account on an "as needed" basis. To establish
these Fund
37
<PAGE> 42
Express options, please provide the appropriate
information on the Account Registration Form. We will
send you a confirmation of your Fund Express service;
please wait three weeks before using the service. The
redemption fee described on pages 33 and 37 applies to
redemption by Fund Express.
--------------------------------------------------------
SELLING BY EXCHANGE You may sell shares of the Fund by making an exchange
into another Vanguard Fund account. Exchanges to or from
the following funds may only be made by mail: VANGUARD
BALANCED INDEX FUND, VANGUARD INDEX TRUST, VANGUARD
INTERNATIONAL EQUITY INDEX FUND AND VANGUARD
QUANTITATIVE PORTFOLIOS. Please see "Exchanging Your
Shares" for details. The redemption fee described on
pages 33 and 37 applies to exchange redemptions.
--------------------------------------------------------
IMPORTANT Shares purchased by check or Fund Express may be
REDEMPTION redeemed at any time. However, your redemption proceeds
INFORMATION will be held at Vanguard until payment for the purchase
is collected, which may take up to ten calendar days.
DELIVERY OF Redemption requests received by telephone prior to the
REDEMPTION regular close of the New York Stock Exchange (generally
PROCEEDS 4:00 p.m. Eastern time), are processed on the day of
receipt and the redemption proceeds are normally sent on
the following business day.
Redemption requests received by telephone after the
close of the Exchange are processed on the business day
following receipt and the proceeds are normally sent on
the second business day following receipt.
All unpaid dividend and capital gains distributions
credited to your account up to the date of redemption
will be included in the redemption check. Redemption
proceeds must be sent to you within seven days of
receipt of your request in Good Order.
If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular
or express mail. It will be implemented at the net asset
value next determined after your request has been
received by Vanguard in Good Order. The Fund reserves
the right to revise or terminate the telephone
redemption privilege at any time.
The Fund may suspend the redemption right to postpone
payments at times when the New York Stock Exchange is
closed, or under any emergency circumstances as
determined by the United States Securities and Exchange
Commission.
If the Board of Directors determines that it would be
detrimental to the best interests of the Fund's
remaining shareholders to make payment in cash, the Fund
may pay redemption proceeds in whole or in part by a
distribution in kind of readily marketable securities.
--------------------------------------------------------
38
<PAGE> 43
VANGUARD'S AVERAGE If you make a redemption from a qualifying account,
COST STATEMENT Vanguard will send you an Average Cost Statement which
provides you with the tax basis of the shares you
redeemed. Please see "Other Vanguard Services" for
additional information.
--------------------------------------------------------
MINIMUM ACCOUNT Due to the relatively high cost of maintaining smaller
BALANCE REQUIREMENT accounts, the Fund reserves the right to redeem shares
in any account that is below the minimum initial
investment amount of $3,000. If at any time your total
investment does not have a value of at least $3,000, you
may be notified that your account is below the Fund's
minimum account balance requirement. You would then be
allowed 60 days to make an additional investment before
the account is liquidated. Proceeds would be promptly
paid to the registered shareholder. (This minimum does
not apply to IRAs, other retirement accounts, and
Uniform Gifts/Transfers to Minors Act accounts.)
The Fund's minimum account balance requirement will not
apply if your account falls below $3,000 solely as a
result of declining markets (i.e., a decline in a
Portfolio's net asset value).
- --------------------------------------------------------------------------------
EXCHANGING Should your investment goals change, you may exchange
YOUR SHARES your shares of Vanguard Horizon Fund for those of other
available Vanguard Funds.
IMPORTANT NOTE: For investors in the Fund, a redemption
fee amounting to 1% of the value of the shares exchanged
will be deducted from the exchange proceeds if shares
held for less than 5 years are exchanged. This fee is
paid directly to the Portfolio.
EXCHANGE BY When exchanging shares by telephone, please have ready
TELEPHONE the Fund name, account number, Social Security number or
Call Client Services Employer Identification number listed on the account and
(1-800-662-2739) exact name and address in which the account is
registered. Only the registered shareholder may complete
such an exchange. Requests for telephone exchanges
received prior to the close of trading on the New York
Stock Exchange (generally 4:00 p.m. Eastern time) are
processed at the close of business that same day.
Requests received after the close of the Exchange are
processed the next business day. TELEPHONE EXCHANGES ARE
NOT ACCEPTED INTO OR FROM VANGUARD BALANCED INDEX FUND,
VANGUARD INDEX TRUST, VANGUARD INTERNATIONAL EQUITY
INDEX FUND AND VANGUARD QUANTITATIVE PORTFOLIOS. If you
experience difficulty in making a telephone exchange,
your exchange request may be made by regular or express
mail, and it will be implemented at the closing net
asset value on the date received by Vanguard provided
the request is received in Good Order.
--------------------------------------------------------
EXCHANGING BY MAIL Please be sure to include on your exchange request the
name and account number of your current Fund, and the
name of the Fund you wish to exchange into, the amount
you wish to exchange, and the signatures of all
registered account holders. Send your request to
VANGUARD FINANCIAL CENTER, VANGUARD HORIZON FUND, P.O.
BOX 1120, VALLEY FORGE, PA 19482. (For express or
registered mail, send your
39
<PAGE> 44
requests to Vanguard Financial Center, Vanguard Horizon
Fund, 455 Devon Park Drive, Wayne, PA 19087.)
--------------------------------------------------------
IMPORTANT EXCHANGE Before you make an exchange, you should consider the
INFORMATION following:
- Please read the Fund's prospectus before making an
exchange. For a copy of the prospectus and for answers
to any questions you may have, call our Investor
Information Department (1-800-662-7447).
- An exchange is treated as a redemption from one fund
and a purchase into another. Therefore, you could
realize a taxable gain or loss on the transaction.
- Exchanges are accepted only if the registrations and
the Taxpayer Identification numbers of the two
accounts are identical.
- New accounts are not currently accepted in
Vanguard/Windsor Fund or Vanguard/PRIMECAP Fund.
- The shares to be exchanged must be on deposit and not
held in certificate form.
- The redemption fee described on pages 33 and 37
applies to exchange redemptions.
Every effort will be made to maintain the exchange
privilege. However, the Fund reserves the right to
revise or terminate its provisions, limit the amount of
or reject any exchange, as deemed necessary, at any
time.
The exchange privilege is only available in states in
which the shares of the Fund are registered for sale.
The Fund's shares are currently registered for sale in
all 50 states and the Fund intends to maintain such
registration.
- --------------------------------------------------------------------------------
EXCHANGE The Fund's exchange privilege is not intended to afford
PRIVILEGE shareholders a way to speculate on short-term movements
LIMITATIONS in the market. Accordingly, in order to prevent
excessive use of the exchange privilege that may
potentially disrupt the management of the Fund and
increase transaction costs, the Fund has established a
policy of limiting excessive exchange activity.
Exchange activity generally will not be deemed excessive
if limited to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT
LEAST 30 DAYS APART) from the Fund during any twelve
month period. Notwithstanding these limitations, the
Fund reserves the right to reject any purchase request
(including purchases from other Vanguard portfolios)
that is reasonably deemed to be disruptive to efficient
portfolio management.
- --------------------------------------------------------------------------------
IMPORTANT The ability to initiate redemptions (except wire
INFORMATION redemptions) and exchanges by telephone is automatically
ABOUT TELEPHONE established on your account unless you request in
TRANSACTIONS writing that telephone transactions on your account not
be permitted.
40
<PAGE> 45
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions,
Vanguard adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by
telephone, the caller must know (i) the name of the
Portfolio; (ii) the 10-digit account number; (iii)
the exact name and address used in the registration;
and (iv) the Social Security or Employer
Identification number listed on the account.
2. PAYMENT POLICY. The proceeds of any telephone
redemption made by mail will be payable to the
registered shareowner and mailed to the address of
record, only.
Neither the Fund nor Vanguard will be responsible for
the authenticity of transaction instructions received by
telephone, provided that reasonable security procedures
have been followed. Vanguard believes that the security
procedures described above are reasonable, and that if
such procedures are followed, you will bear the risk of
any losses resulting from unauthorized or fraudulent
telephone transactions on your account.
- --------------------------------------------------------------------------------
TRANSFERRING You may transfer the registration of any of your Fund
REGISTRATION shares to another person by completing a transfer form
and sending it to: VANGUARD FINANCIAL CENTER, P.O. BOX
1110, VALLEY FORGE, PA 19482. The request must be in
Good Order. BEFORE MAILING YOUR REQUEST, PLEASE CALL OUR
CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR FURTHER
INSTRUCTIONS.
- --------------------------------------------------------------------------------
STATEMENTS AND Vanguard will send you a confirmation statement each
REPORTS time you initiate a transaction in your account (except
for checkwriting redemptions from Vanguard money market
accounts). You will also receive a comprehensive account
statement at the end of each calendar quarter. The
fourth-quarter statement will be a year-end statement,
listing all transaction activity for the entire calendar
year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account, using
the average cost single category method. This service is
available for most taxable accounts opened since January
1, 1986. In general, investors who redeemed shares from
a qualifying Vanguard account may expect to receive
their Average Cost Statement in February of the
following year. Please call our Client Services
Department (1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you
semi-annually, according to the Fund's fiscal year-end.
- --------------------------------------------------------------------------------
OTHER VANGUARD For more information about any of these services, please
SERVICES call our Investor Information Department at
(1-800-662-7447).
VANGUARD DIRECT With Vanguard's Direct Deposit Service, most U.S.
DEPOSIT SERVICE Government checks (including Social Security and
military pension checks) and private payroll checks may
be automatically deposited into your Vanguard Fund
41
<PAGE> 46
account. Separate brochures and forms are available for
direct deposit of U.S. Government and private payroll
checks.
VANGUARD AUTOMATIC Vanguard's Automatic Exchange Service allows you to move
EXCHANGE SERVICE money automatically among your Vanguard Fund accounts.
For instance, the service can be used to "dollar cost
average" from a money market portfolio into a stock or
bond fund or to contribute to an IRA or other retirement
plan. Please contact our Client Services Department at
1-800-662-2739 for additional information.
VANGUARD FUND Vanguard's Fund Express allows you to transfer money
EXPRESS between your Fund account and your account at a bank,
savings and loan association, or a credit union that is
a member of the Automated Clearing House (ACH) system.
You may elect this service on the Account Registration
Form or call our Investor Information Department
(1-800-662-7447) for a Fund Express application.
The minimum amount that can be transferred by telephone
is $100. However, if you have established one of the
automatic options, the minimum amount is $50. The
maximum amount that can be transferred using any of the
options is $100,000.
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition,
some services of Fund Express cannot be used with
specific Vanguard Funds. For more information please
refer to the Vanguard Fund Express brochure.
VANGUARD DIVIDEND Vanguard's Dividend Express allows you to transfer your
EXPRESS dividend and/or capital gains distribution automatically
from your Fund account, one business day after the
Fund's payable date, to your account at a bank, savings
and loan association, or a credit union that is a member
of the Automatic Clearing House (ACH) system. You may
elect this service on the Account Registration Form or
call our Investor Information Department
(1-800-662-7447) for a Vanguard Dividend Express
application.
VANGUARD Vanguard's Tele-Account is a convenient, automated
TELE-ACCOUNT service that provides share price, price change and
yield quotations on Vanguard Funds through any Touch
ToneTM telephone. This service also lets you obtain
information on your account balance, last transaction,
and your most recent dividend or capital gains payment.
To contact Vanguard's Tele-Account service, dial
1-800-ON-BOARD (1-800-662-6273). A brochure offering
detailed operating instructions is available from the
Investor Information Department (1-800-662-7447).
- --------------------------------------------------------------------------------
42
<PAGE> 47
[THIS PAGE INTENTIONALLY LEFT BLANK.]
<PAGE> 48
[THIS PAGE INTENTIONALLY LEFT BLANK.]
<PAGE> 49
[VANGUARD LOGO]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
---------------------------
THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)
TELECOMMUNICATION SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
P069
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 50
PART B
VANGUARD HORIZON FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
JUNE 30, 1995; REVISED JULY 21, 1995
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus (dated June 30, 1995; revised July 21, 1995). To
obtain the Prospectus please call the Investor Information Department:
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies........................................................ 1
Investment Policies....................................................................... 2
Investment Limitations.................................................................... 5
Management of the Fund.................................................................... 7
Investment Advisory Services.............................................................. 9
Securities Transactions................................................................... 14
Purchase of Shares........................................................................ 14
Redemption of Shares...................................................................... 15
Comparative Indexes....................................................................... 15
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the Fund's investment objectives and
policies set forth in the Prospectus.
FOREIGN INVESTMENTS As indicated in the Prospectus, The Global Equity,
Global Asset Allocation and Capital Opportunity Portfolios will include foreign
securities. The Aggressive Growth Portfolio will not invest in foreign
securities. Investors should recognize that investing in foreign companies
involves certain special considerations which are not typically associated with
investing in U.S. companies. Since the stocks of foreign companies are
frequently denominated in foreign currencies, and since the Portfolios may
temporarily hold uninvested reserves in bank deposits in foreign currencies, the
Portfolio will be affected favorably or unfavorably by changes in currency rates
and in exchange control regulations, and may incur costs in connection with
conversions between various currencies. The investment policies of each
Portfolio permit it to enter into forward foreign currency exchange contracts in
order to hedge the Portfolio's holdings and commitments against changes in the
level of future currency rates. Such contracts involve an obligation to purchase
or sell a specific currency at a future date at a price set at the time of the
contract. The Global Equity Portfolio will not commit more than 20% of its
assets to such contracts. However, although the Portfolio does not intend to do
so, under unusual circumstances it is possible that 100% of the assets of the
Global Asset Allocation Portfolio would be committed to forward foreign currency
exchange contracts.
As foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards and practices comparable to those
applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S investments in those countries.
1
<PAGE> 51
Although the Portfolios will endeavor to achieve the most favorable
execution costs in their portfolio transactions in foreign securities, fixed
commissions on many foreign stock exchanges are generally higher than negotiated
commissions on U.S. exchanges. In addition, it is expected that the expenses for
custodial arrangements of the Portfolios' foreign securities will be somewhat
greater than the expenses for the custodian arrangements for handling U.S.
securities of equal value.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income the Portfolio receives from its foreign investments. However, these
foreign withholding taxes are not expected to have a significant impact on the
Portfolios, since each Portfolio's investment objective is to seek long-term
capital appreciation and any income should be considered incidental.
PORTFOLIO TURNOVER While the rate of portfolio turnover is not a limiting
factor when management deems changes appropriate, it is anticipated that each
Portfolio's annual portfolio turnover rate will not normally exceed 200%. A
portfolio turnover rate of 100% would occur if all of the Portfolio's
securities, exclusive of U.S. Government securities and other securities whose
maturities at the time of acquisition are one year or less, are replaced in the
period of one year. Turnover rates may vary greatly from year to year as well as
within a particular year and may also be affected by cash requirements for
redemptions of each Portfolio's shares and by requirements which enable the Fund
to receive certain favorable tax treatments. The portfolio turnover rates will,
of course, depend in large part on the level of purchases and redemptions of
shares of each Portfolio. Higher portfolio turnover can result in corresponding
increases in brokerage costs to the Portfolios of the Fund and their
shareholders.
INVESTMENT POLICIES
FUTURES CONTRACTS Each Portfolio may enter into futures contracts,
options, and options on futures contracts for several reasons: to maintain cash
reserves while remaining fully invested, to facilitate trading, to reduce
transaction costs, or to seek higher investment returns when a futures contract
is priced more attractively than the underlying equity security or index.
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a specific security at a specified future
time and at a specified price. Futures contracts which are standardized as to
maturity date and underlying financial instrument are traded on national futures
exchanges. Futures exchanges and trading are regulated under the Commodity
Exchange Act by the Commodity Futures Trading Commission ("CFTC"), a U.S.
Government Agency.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. The Fund's margin deposits will be placed in a
segregated account maintained by the Fund's custodian bank. A margin deposit is
intended to assure completion of the contract (delivery or acceptance of the
underlying security) if it is not terminated prior to the specified delivery
date. Minimal initial margin requirements are established by the futures
exchange and may be changed. Brokers may establish deposit requirements which
are higher than the exchange minimums. Futures contracts are customarily
purchased and sold on margin which may range upward from less than 5% of the
value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund
expects to earn interest income on its margin deposits.
2
<PAGE> 52
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the prices of underlying securities.
Although techniques other than the sale and purchase of futures contracts
could be used to control a Portfolio's exposure to market fluctuations, the use
of futures contracts may be a more effective means of hedging this exposure.
While a Portfolio will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in the
purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS A Portfolio will not enter
into futures contract transactions to the extent that, immediately thereafter,
the sum of its initial margin deposits on open contracts exceeds 5% (15% with
respect to the Global Asset Allocation Portfolio) of the market value of its
total assets. In addition, a Portfolio will not enter into futures contracts to
the extent that its outstanding obligations to purchase securities under these
contracts would exceed 20% of its total assets (50% with respect to the Global
Asset Allocation Portfolio).
RISK FACTORS IN FUTURES TRANSACTIONS Positions in futures contracts may be
closed out only on an Exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Portfolio would continue to be required to make daily cash payments
to maintain its required margin. In such situations, if the Portfolio has
insufficient cash, it may have to sell portfolio securities to meet daily margin
requirements at a time when it may be disadvantageous to do so. In addition, a
Portfolio may be required to make delivery of the instruments underlying futures
contracts it holds. The inability to close options and futures positions also
could have an adverse impact on the ability to effectively hedge.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the futures
strategies of the Fund are engaged in only for hedging purposes, the Adviser
does not believe that the Portfolios are subject to the risks of loss frequently
associated with futures transactions. A Portfolio would presumably have
sustained comparable losses if, instead of the futures contract, it had invested
in the underlying financial instrument and sold it after the decline. Futures
and options are derivative instruments, in that their value is derived from the
value of another security. Equity futures contracts and index put options may be
used by the Portfolio advisers of the Global Asset Allocation Portfolio and the
Capital Opportunity Portfolio, respectively. By doing so, the Portfolio's
advisers will expose investors to risks inherent in these commonly used
strategies.
Utilization of futures transactions by a Portfolio does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that a Portfolio could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by a Portfolio of margin deposits in the event of bankruptcy of a
broker with whom the Portfolio has an open position in a futures contract or
related option. Additionally, investments in futures contracts and options
involve the risk that the investment advisers will incorrectly predict stock
market and interest rate trends.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary
3
<PAGE> 53
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of future positions and
subjecting some futures traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS Except for transactions the
Fund has identified as hedging transactions, each Portfolio is required for
Federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on certain futures contracts as of the end of the
year as well as those actually realized during the year. In most cases, any gain
or loss recognized with respect to a futures contract is considered to be 60%
long-term capital gain or loss and 40% short-term capital gain or loss, without
regard to the holding period of the contract. Furthermore, sales of futures
contracts which are intended to hedge against a change in the value of
securities held by a Portfolio may affect the holding period of such securities
and, consequently, the nature of the gain or loss on such securities upon
disposition.
In order for a Portfolio to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities or foreign currencies or other income derived with respect to the
Fund's business of investing in securities. In addition, gains realized on the
sale or other disposition of securities held for less than three months must be
limited to less than 30% of the Portfolio's annual gross income. It is
anticipated that any net gain realized from the closing out of futures contracts
will be considered gain from the sale of securities and therefore be qualifying
income for purposes of the 90% requirement. In order to avoid realizing
excessive gains on securities held less than three months, the Portfolio may be
required to defer the closing out of futures contracts beyond the time when it
would otherwise be advantageous to do so. It is anticipated that unrealized
gains on futures contracts, which have been open for less than three months as
of the end of the Portfolio's fiscal year and which are recognized for tax
purposes, will not be considered gains on sales of securities held less than
three months for the purpose of the 30% test.
A Portfolio will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes (including unrealized
gains at the end of the Fund's fiscal year) on futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the Portfolio's other investments and shareholders will be advised on the nature
of the transactions.
REPURCHASE AGREEMENTS Each Portfolio may invest in repurchase agreements
with commercial banks, brokers or dealers either for defensive purposes due to
market conditions or to generate income from its excess cash balances. A
repurchase agreement is an agreement under which the Fund acquires a money
market instrument (generally a security issued by the U.S Government or an
agency thereof, a banker's acceptance or a certificate of deposit) from a
commercial bank, broker or dealer, subject to resale to the seller at an agreed
upon price and date (normally, the next business day). A repurchase agreement
may be considered a loan collateralized by securities. The resale price reflects
an agreed upon interest rate effective for the period the instrument is held by
the Portfolio and is unrelated to the interest rate on the underlying
instrument. In these transactions, the securities acquired by the Portfolio
(including accrued interest earned thereon) must have a total value in excess of
the value of the repurchase agreement and are held by the Fund's Custodian Bank
until repurchased. In addition, the Fund's Board of Directors will monitor each
Portfolio's repurchase agreement transactions generally and will establish
guidelines and standards for review by the investment adviser of the
creditworthiness of any bank, broker or dealer party to a repurchase agreement
with any Portfolio of the Fund. No more than an aggregate of 15% of a
Portfolio's assets, at the time of investment, will be invested in repurchase
agreements having maturities longer than seven days and securities subject to
legal or contractual restrictions on resale, or for which there are no readily
available market quotations.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Portfolio may incur a loss upon disposition of the security. If the other party
to the agreement
4
<PAGE> 54
becomes insolvent and subject to liquidation or reorganization under the
Bankruptcy Code or other laws, a court may determine that the underlying
security is collateral for a loan by the Portfolio not within the control of the
Portfolio and therefore the realization by the Portfolio on such collateral may
be automatically stayed. Finally, it is possible that the Portfolio may not be
able to substantiate its interest in the underlying security and may be deemed
an unsecured creditor of the other party to the agreement. While the Fund's
management acknowledges these risks, it is expected that they can be controlled
through careful monitoring procedures.
LENDING OF SECURITIES Each Portfolio may lend its securities on a
short-term basis (less than nine months) to qualified institutional investors
who need to borrow securities in order to complete certain transactions, such as
covering short sales, avoiding failures to deliver securities or completing
arbitrage operations. By lending its securities, the Portfolio will be
attempting to increase its net investment income through the receipt of interest
on the loan. Any gain or loss in the market price of the securities loaned that
might occur during the term of the loan would be for the account of the
Portfolio. Each Portfolio may lend its portfolio securities to qualified
brokers, dealers, banks or other financial institutions, so long as the terms,
the structure and the aggregate amount of such loans are not inconsistent with
the Investment Company Act of 1940, or the Rules and Regulations or
interpretations of the Securities and Exchange Commission (the "Commission")
thereunder, which currently require that (a) the borrower pledge and maintain
with the Fund collateral consisting of cash, an irrevocable letter of credit or
securities issued or guaranteed by the United States Government having a value
at all times not less than 100% of the value of the securities loaned, (b) the
borrower add to such collateral whenever the price of the securities loaned
rises (i.e., the borrower "marks to the market" on a daily basis), (c) the loan
be made subject to termination by the Portfolio at any time and (d) the
Portfolio receives reasonable interest on the loan which may include the
Portfolio's investing any cash collateral in interest bearing short-term
investments, any distribution on the loaned securities and any increase in their
market value. A Portfolio will not be required to pay any service, placement or
other fee in connection with such loans, and will retain voting rights to the
loaned securities. A Portfolio will not lend its portfolio securities, if as a
result, the aggregate value of such loans exceeds 33 1/3% of the value of the
Portfolio's net assets. Loan arrangements made by a Portfolio will comply with
all other applicable regulatory requirements, including the rules of the New
York Stock Exchange, which rules presently require the borrower, after notice,
to redeliver the securities within the normal settlement time of five business
days. All relevant facts and circumstances, including the credit-worthiness of
the broker, dealer or institution, will be considered in making decisions with
respect to the lending of securities, subject to review by the Fund's Board of
Directors.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Directors (Trustees). In addition, voting
rights may pass with the loaned securities, but if a material event will occur
affecting an investment on loan, the loan must be called and the securities
voted.
INVESTMENT LIMITATIONS
The following policies supplement the Fund's investment limitations set
forth in the Prospectus. It is a fundamental policy of each Portfolio not to
engage in any of the following activities or business practices. These
restrictions may not be changed with respect to a particular Portfolio without
the approval of a majority of the outstanding shares (as defined in the
Investment Company Act of 1940) of that Portfolio. A Portfolio may not:
1) Issue senior securities;
2) Borrow money, except from banks (or through reverse repurchase
agreements), for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might otherwise
require the untimely disposition of securities, in an amount not in
excess of 15% of the value of the net assets of the Portfolio
(including the amount borrowed and the value of any outstanding reverse
repurchase agreements) at the time the borrowing is made. Whenever
borrow-
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<PAGE> 55
ings exceed 5% of the value of the net assets of the Portfolio, the
Portfolio will not make any additional investments;
3) With respect to 75% of the value of its total assets, purchase the
securities of any issuer (except obligations of the United States
government and its instrumentalities) if as a result the Portfolio
would hold more than 10% of the outstanding voting securities of the
issuer, or more than 5% of the value of the Portfolio's total assets
would be invested in the securities of such issuer;
4) Engage in the business of underwriting securities issued by others,
except to the extent that the Portfolio may technically be deemed to be
an underwriter under the Securities Act of 1933, as amended, in
disposing of portfolio securities;
5) Purchase or otherwise acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are illiquid
(including the Fund's investment in The Vanguard Group, Inc., as
described on page 7);
6) Make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitation
described in (5) above) which are either publicly distributed or
customarily purchased by institutional investors, and (ii) by lending
its securities to banks, brokers, dealers and other financial
institutions so long as such loans are not inconsistent with the
Investment Company Act or the Rules and Regulations or interpretations
of the Commission thereunder and the aggregate value of all securities
loaned does not exceed 33 1/3% of the market value of the Portfolio's
total assets;
7) Pledge, mortgage, or hypothecate its assets, except to secure
borrowings permitted by limitation (2) above;
8) Buy any securities or other property on margin (except for such
short-term credits as are necessary for the clearance of transactions),
or, with the exception of the Capital Opportunity Portfolio, engage in
short sales (unless by virtue of its ownership of other securities it
has a right to obtain at no added cost securities equivalent in kind
and amount to the securities sold) except as set forth below in (12);
9) Purchase or sell puts or calls, or combinations thereof except as
provided for in the prospectus; provided however, that a Portfolio may
enter into futures contracts, options transactions or forward foreign
currency exchange transactions except as set forth below in (12);
10) Purchase or sell real estate or real estate limited partnerships
(although it may purchase securities secured by real estate interests
or interests therein, or issued by companies or investment trusts which
invest in real estate or interests therein);
11) The Fund will not invest in securities of other investment companies,
except as may be acquired as a part of a merger, consolidation or
acquisition of assets approved by the Fund's shareholders or otherwise
to the extent permitted by Section 12 of the Investment Company Act of
1940. The Fund will invest only in investment companies which have
investment objectives and investment policies consistent with those of
the Fund;
12) Purchase or sell commodities or commodity contracts; provided, however,
that a Portfolio may enter into forward foreign currency exchange
transactions and that each Portfolio may invest in futures contracts
and options to the extent that not more than 5% (15% with respect to
the Global Asset Allocation Portfolio) of the Portfolio's assets are
required as deposit to secure obligations under futures contracts,
within these limitations, each portfolio may purchase put options as
provided for in the prospectus. Additionally each Portfolio will invest
no more than 20% of its assets in swap agreements;
13) Invest in companies for the purpose of exercising control of
management; and
14) Invest more than 25% of its assets in any single industry.
Notwithstanding these limitations, the Fund may own all or any portion of
the securities of, make loans to, or contribute to the costs or other financial
requirements of, any company which will be wholly owned by
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<PAGE> 56
the Fund and one or more other investment companies and is primarily engaged in
the business of providing at cost services, such as management, administrative,
distribution or other related services to the Fund and other investment
companies. (See "Management of the Fund").
In order to permit the sale of shares of the Fund in certain states, the
Fund may make commitments more restrictive than the fundamental or
non-fundamental operating restrictions described above. Should the Fund
determine that any such commitment is no longer in the best interests of the
Fund and its shareholders it will revoke the commitment by terminating sales of
its shares in the state(s) involved.
The above-mentioned investment limitations are considered at the time
investment securities are purchased.
MANAGEMENT OF THE FUND
THE VANGUARD GROUP The Fund is a member of The Vanguard Group of
Investment Companies which consists of more than 30 investment companies.
Through their jointly-owned subsidiary, The Vanguard Group, Inc. ("Vanguard"),
the Vanguard Funds obtain at cost virtually all of their corporate management,
administrative and distribution services. Vanguard also provides investment
advisory services on an at-cost basis to certain of the Vanguard Funds.
Vanguard employs a supporting staff of management personnel needed to
provide the requisite services to the Funds and also furnishes the Funds with
necessary office space, furnishings and equipment. Each Fund pays its share of
Vanguard's net expenses which are allocated among the Funds under procedures
approved by the Directors (Trustees) of each Fund. In addition, each Fund bears
its own direct expenses such as legal, auditing and custodian fees.
The Officers of the Fund and the Vanguard Funds are also Officers and
employees of Vanguard. No Officer or employee is permitted to own any securities
of any external adviser for the Vanguard Funds.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-l under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions. However, such
transactions are subject to procedures, restrictions and guidelines
substantially similar to those recommended by the mutual fund industry and
approved by the U.S. Securities and Exchange Commission.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
amounts which each of the Funds have invested are adjusted from time to time in
order to maintain the proportionate relationship between each Fund's relative
net assets and its contribution to Vanguard's capital. The Fund's Service
Agreement provides as follows: (a) each Vanguard Fund may invest up to .40% of
its current assets in Vanguard, and (b) there is no other limitation on the
amount that each Vanguard Fund may contribute to Vanguard's capitalization. The
amount contributed to Vanguard by the Fund's Portfolios included the Service
Economy and Technology Portfolios which are no longer in existence.
The Officers of the Fund manage its day-to-day operations and are
responsible to the Fund's Board of Directors. The Directors set broad policies
for each Fund and choose its Officers. The following is a list of the Directors
and Officers of the Funds and a statement of their present positions and
principal occupations during the past five years. The mailing address of the
Directors and Officers of the Fund is Post Office Box 876, Valley Forge, PA
19482.
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<PAGE> 57
<TABLE>
<S> <C>
JOHN C. BOGLE, Chairman, Chief JOHN C. SAWHILL, Director
Executive Officer and Director* President and Chief Executive Officer, The
Chairman, Chief Executive Officer and Nature Conservancy; formerly, Director and
Director of The Vanguard Group, Inc. and of Senior Partner, McKinsey & Co.; and
each of the investment companies in The President, New York University; Director of
Vanguard Group; Director of The Mead Pacific Gas and Electric Company and NACCO
Corporation and General Accident Insurance. Industries.
JOHN J. BRENNAN, President and Director* JAMES O. WELCH, JR., Director
President and Director of The Vanguard Retired Chairman of Nabisco Brands, Inc.,
Group, Inc. and of each of the investment retired Vice Chairman and Director of RJR
companies in The Vanguard Group. Nabisco; Director of TECO Energy, Inc.
ROBERT E. CAWTHORN, Director J. LAWRENCE WILSON, Director
Chairman of Rhone-Poulenc Rorer, Inc.; Chairman and Chief Executive Officer of Rohm &
Director of Sun Company, Inc. Haas Company; Director of Cummins Energy
Company, and Trustee of Vanderbilt
BARBARA BARNES HAUPTFUHRER, Director University and the Culver Educational
Director of The Great Atlantic and Pacific Foundation.
Tea Company, ALCO Standard Corp., Raytheon
Company, Knight-Ridder, Inc., Massachusetts RAYMOND J. KLAPINSKY, Secretary*
Mutual Life Insurance Co. and Trustee Senior Vice President and Secretary of The
Emerita of Wellesley College. Vanguard Group, Inc.; Secretary of each of the
investment companies in The Vanguard Group.
BRUCE K. MACLAURY, Director
President, The Brookings Institution; RICHARD F. HYLAND, Treasurer*
Director of American Express Bank, Ltd., The Treasurer of The Vanguard Group, Inc. and of
St. Paul Companies, Inc. and Scott Paper Co. each of the investment companies in The
Vanguard Group.
BURTON G. MALKIEL, Director
Chemical Bank Chairman's Professor of KAREN E. WEST, Controller*
Economics, Princeton University; Director of Vice President of The Vanguard Group, Inc.;
Prudential Insurance Co. of America, Amdahl Controller of each of the investment companies
Corporation, Baker Fentress & Co., The in The Vanguard Group.
Jeffrey Co. and Southern New England ---------------
Communications Company. *Officers of the Fund are "interested persons"
as defined in the Investment Company Act of
ALFRED M. RANKIN, JR., Director 1940.
Chairman, President, and Chief Executive
Officer of NACCO Industries, Inc.; Director
of The BFGoodrich Company, The Standard
Products Company and The Reliance Electric
Company.
</TABLE>
MANAGEMENT Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Vanguard Funds by third parties.
DISTRIBUTION Vanguard also provides all distribution and marketing
services for the Vanguard Funds. The principal distribution expenses are for
advertising, promotional materials and marketing personnel. Distribution
services may also include organizing and offering to the public, from time to
time, one or more new investment companies which will become members of the
Group. The Directors and Officers of Vanguard determine the amount to be spent
annually on distribution activities, the manner and amount to be spent on each
Fund, and whether to organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
are allocated among the Vanguard Funds based upon their relative net assets. The
remaining one half of these expenses is allocated among the Vanguard Funds based
upon each Fund's sales for the preceding 24 months relative to the total sales
of the Funds as a Group. Provided, however, that no Fund's aggregate quarterly
rate of contribution for distribution expenses of a marketing and promotional
nature shall exceed 125% of the average distribution expense rate for the Group,
and that no Fund shall incur annual distribution expenses in excess of 20/100 of
1% of its average month-end net assets.
INVESTMENT ADVISORY SERVICES An experienced investment management staff
employed directly by Vanguard also provides investment advisory services to the
Fund, Vanguard Money Market Reserves, Vanguard Institutional Money Market
Portfolio, Vanguard Municipal Bond Fund, several Portfolios of Vanguard Fixed
Income Securities Fund, Vanguard California Tax-Free Fund, Vanguard Florida
Insured Tax-Free Fund, Vanguard New Jersey Tax-Free Fund, Vanguard New York
Insured Tax-Free Fund, Vanguard Ohio Tax-Free Fund, Vanguard
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Pennsylvania Tax-Free Fund, Vanguard Admiral Funds, Vanguard Bond Index Fund,
Vanguard Balanced Index Fund, Vanguard Index Trust, Vanguard International
Equity Index Fund, Vanguard Tax-Managed Fund, Vanguard Institutional Index Fund,
several Portfolios of Vanguard Variable Insurance Fund, a portion of
Vanguard/Windsor II, a portion of Vanguard/Morgan Growth Fund as well as several
indexed separate accounts. The compensation and other expenses of this staff are
paid by the Portfolios and Funds utilizing these services.
REMUNERATION OF DIRECTORS AND OFFICERS The Fund will pay each Director who
is not also an Officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. Directors who are also Officers receive no
remuneration for their services as Directors. The Fund's Officers and employees
are paid by Vanguard which, in turn, is reimbursed by the Fund, and each other
Fund in the Group, for its proportionate share of Officers' and employees'
salaries and retirement benefits.
Under its retirement plan, Vanguard contributes annually an amount equal to
10% of each Officer's annual compensation plus 5.7% of that part of an eligible
Officer's compensation during the year, if any, that exceeds the Social Security
Taxable Wage Base then in effect. Under its Thrift Plan, all employees of
Vanguard are permitted to make pre-tax basic contributions in a maximum amount
equal to 4% of total compensation. Vanguard matches the basic contributions on a
100% basis.
DIRECTORS' RETIREMENT FEES A Retirement Plan for Directors has been
implemented to provide a fee to retired Directors equal to $1,000 per year of
service on the Board, up to 15 years of service. This fee will remain in place
subsequent to the Director's retirement for a period of 10 years or until a
retired Director's death.
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISORY AGREEMENT WITH MARATHON ASSET MANAGEMENT. The Global
Equity Portfolio is managed by Marathon Asset Management ("Marathon-London"),
115 Shaftesbury Avenue, London under the terms of an agreement dated June 30,
1995. Marathon-London was founded in 1986 and provides asset management services
to companies, institutions, and individuals. As of December 31, 1994, Marathon-
London had over $2 billion in assets under management.
The investment philosophy of Marathon-London is that the best investment
returns for equity portfolios are primarily the result of careful, thoughtful
industry and company evaluation rather than "top down" country allocation
decisions. Marathon-London's portfolios therefore tend to exhibit country
weightings quite similar to broad market benchmarks, such as the unmanaged All
Country Index. Sector and stock weightings will, however, differ markedly from
such standards. The firm uses a team approach with each of the firm's three
partners having the primary responsibility for a specific region, e.g. Europe.
Jerome J. Hosking, Director, has been designated as portfolio manager for the
assets of the Global Equity Portfolio. He has 16 years of investment experience.
The Global Equity Portfolio pays Marathon-London a basic fee at the end of
each fiscal quarter, calculated by applying a quarterly rate, based on the
following annual percentage rates, to the average month-end assets of the
Portfolio for the quarter:
<TABLE>
<CAPTION>
ANNUAL
NET ASSETS RATE
---------- ------
<S> <C>
First $100 million.............................................................. 0.45%
Next $150 million............................................................... 0.40%
Next $250 million............................................................... 0.25%
</TABLE>
The basic advisory fee may be increased or decreased by applying an
adjustment formula based on the investment performance of the Portfolio relative
to the Morgan Stanley Capital International (MSCI) All Country Index. The
following table sets forth the incentive/penalty adjustment to the basic
advisory fee
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<PAGE> 59
payable by the Portfolio to Marathon-London under the investment advisory
agreement. The adjustments to the fee change proportionately with performance
relative to the Index.
<TABLE>
<CAPTION>
CUMULATIVE THREE YEAR PERFORMANCE PERFORMANCE FEE AS
DIFFERENTIAL VS. THE MSCI ALL COUNTRY INDEX A PERCENTAGE OF BASE FEE*
------------------------------------------- -------------------------
<S> <C>
Less than 3%....................................................... 50%
Between 3% and 6%.................................................. 75%
Between 6% and 9%.................................................. 100%
Between 9% and 12%................................................. 125%
More than 12%...................................................... 150%
</TABLE>
- ---------------
* The Base Fee represents the annual rate used in calculating the base advisory
fee multiplied by the average assets for the performance period measured to
calculate the incentive/penalty adjustment.
Under the rules of the Securities & Exchange Commission, the
incentive/penalty fee for Marathon-London will not be fully operable until the
quarter ending October 31, 1998. Prior to that date the incentive/penalty fee
will be calculated according to the following transition rules:
(a) Prior to August 1, 1996. For the quarters ending on or prior to August
1, 1996, the incentive/penalty fee will not be operable. The advisory
fee payable by the Global Equity Portfolio shall be the basic fee,
calculated as set forth above.
(b) August 1, 1996 through October 31, 1998. Beginning with the quarter
ending October 31, 1996, and until the quarter ending October 31, 1998,
the incentive/penalty fee will be based on a comparison of the
investment performance of the Global Equity Portfolio and the MSCI All
Country Index over the number of months that have elapsed between
November 1, 1995 and the end of the quarter for which the fee is being
computed. The number of percentage points by which the investment
performance of the Portfolio must exceed the investment record of the
MSCI-All Country Index shall increase proportionately from four, three,
two and one, respectively, for the twelve months ending October 31,
1996, to twelve, nine, six, and three, for the thirty-six months ending
October 31, 1998.
(c) On and After November 1, 1998. For the quarter ending January 31, 1999
and thereafter, the period used to calculate the incentive/penalty fee
shall be the 36 months preceding the end of the quarter for which the
fee is being computed and the number of percentage points used shall be
12, 9, 6 and 3.
For the purpose of determining the incentive/penalty fee, the net assets of
the Global Equity Portfolio will be averaged over the same period as the
investment performance of the portfolio as well as the investment record of the
MSCI All Country Index as adjusted.
RELATED INFORMATION CONCERNING MARATHON. Marathon-London, 115 Shaftesbury
Avenue, London, England, is an independent, owner-managed investment management
firm founded in 1986 which provides investment advisory services to individuals,
employee benefit plans, investment companies and other institutions. As of
February 3, 1995, Marathon provided investment advisory services to clients
having assets with an approximate value of $2.3 billion.
The agreement will continue until July 1, 1997 and will be renewable
thereafter, for successive one-year periods, only if each renewal is
specifically approved by a vote of the Fund's Board of Directors, including the
affirmative votes of a majority of the Directors who are not parties to the
agreement or "interested persons" (as defined in the Investment Company Act of
1940) of any such party cast in person at a meeting called for the purpose of
considering such approval. In addition, the question of continuance of the
agreement may be presented to the shareholders of the Fund; in such event
continuance shall be effected only if approved by the affirmative vote of a
majority of the outstanding voting securities of the Fund. If the holders of any
Portfolio fail to approve the agreement, Marathon-London may continue to serve
as investment adviser to each Portfolio which approved the agreement, and to any
Portfolio which did not approve the agreement until new arrangements have been
made. The agreement is automatically terminated if assigned, and may be
terminated by any Portfolio without penalty, at any time, (1) either by vote of
the Board of Directors or by vote of the outstanding voting securities of the
Portfolio on sixty (60) days' written notice to Marathon-London, or (2) by
Marathon-London upon ninety (90) days' written notice to the Fund.
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<PAGE> 60
INVESTMENT ADVISORY AGREEMENT WITH HUSIC CAPITAL MANAGEMENT. Husic Capital
Management ("Husic") serves as investment adviser to the Capital Opportunity
Portfolio under an Investment Advisory Agreement dated May 23, 1995. For the
services provided by Husic under the agreement, the Portfolio will pay Husic an
investment advisory fee at the end of each fiscal quarter, by applying a
quarterly rate based on the following annual percentage rates, to the average
month-end assets of the Portfolio for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------- ------
<S> <C>
First $100 million.............................................................. 0.40%
Next $200 million............................................................... 0.35%
Next $300 million............................................................... 0.25%
Next $400 million............................................................... 0.20%
Over $1 billion................................................................. 0.15%
</TABLE>
Effective with the quarter ending October 31, 1996, the basic advisory fee
may be increased or decreased by applying an adjustment formula based on the
investment performance of the Capital Opportunity Portfolio relative to the
Capital Opportunity Fund Stock Index. The following table sets forth the
incentive/penalty adjustment to the basic advisory fee payable by the Portfolio
to Husic.
<TABLE>
<CAPTION>
ANNUAL NET
PERFORMANCE PERFORMANCE FEE
DIFFERENCE RELATIVE AS A PERCENTAGE
TO BENCHMARK OF BASE FEE*
------------------ ---------------
<S> <C>
Less than -12%............................................................ 25%
-12% to -6%............................................................... 50%
-6% to +6%................................................................ 100%
Between +6% to +12%....................................................... 150%
More than +12%............................................................ 175%
</TABLE>
- ---------------
* The Base Fee represents the annual rate used in calculating the base advisory
fee multiplied by the average assets for the performance period measured to
calculate the incentive/penalty adjustment.
Under the rules of the Security and Exchange Commission, the
incentive/penalty fee structure will not be fully operable until the quarter
ending October 31, 1998, and, until that date, will be calculated according to
the following transition rules.
(a) Prior to August 1, 1996. For the quarters ending on or prior to August
1, 1996, the incentive/penalty fee will not be operable. The advisory
fee payable by the Capital Opportunity Portfolio shall be the basic
fee, calculated as set forth above.
(b) August 1, 1996 through October 31, 1998. Beginning with the quarter
ending October 31, 1996, and until the quarter ending October 31, 1998,
the incentive/penalty fee will be based on a comparison of the
investment performance of the Capital Opportunity Portfolio and the
MSCI All Country Index over the number of months that have elapsed
between November 1, 1995 and the end of the quarter for which the fee
is being computed. The number of percentage points by which the
investment performance of the Portfolio must exceed the investment
record of the Capital Opportunity Index shall increase proportionately
from four and two, respectively, for the twelve months ending July 31,
1996, to twelve and six, for the thirty-six months ending July 31,
1998.
(c) On and After October 31, 1998. For the quarter ending January 31,
1999, and thereafter, the period used to calculate the
incentive/penalty fee shall be the 36 months preceding the end of the
quarter for which the fee is being computed and the number of
percentage points used shall be 12 and 6.
RELATED INFORMATION CONCERNING HUSIC. Husic Capital Management, 555
California Street, Suite 2900, San Francisco, California 94104, a California
limited partnership founded in 1986, provides investment advisory services to
investment companies, other institutions, and individuals. Frank J. Husic,
managing partner, is a controlling person of Husic. Husic's general partner is
Frank J. Husic & Co., a California corporation that is wholly owned by Frank J.
Husic. As of July 1, 1993, Husic provided investment advisory services to
clients having assets with an approximate value of $2.3 billion. The agreement
will continue
11
<PAGE> 61
until May 24, 1997 under the same terms and conditions as described on page 10
with respect to Marathon-London.
INVESTMENT ADVISORY AGREEMENT WITH STRATEGIC INVESTMENT MANAGEMENT.
Strategic Investment Management ("SIM") serves as investment adviser to the
Global Asset Allocation Portfolio under an Investment Advisory Agreement dated
July 7, 1995. For the services provided by SIM under the agreement, the
Portfolio will pay SIM an advisory fee at the end of each fiscal quarter, by
applying a quarterly rate based on the following annual percentage rates, to
the average month-end assets of the Portfolio for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------- ------
<S> <C>
First $250 million.............................................................. 0.40%
Next $250 million............................................................... 0.35%
Next $500 million............................................................... 0.25%
Over $1 billion................................................................. 0.20%
</TABLE>
Effective with the quarter ending October 31, 1996, the basic advisory fee
may be increased or decreased by applying an adjustment formula based on the
investment performance of the Global Asset Allocation Portfolio relative to the
theoretical Global Balanced Index which is calculated as follows:
60% global stock investments
30% global bond investments
10% U.S. cash reserve investments
The 60% global stock component is an adjusted capitalization-weighted
average of the established local stock market index in each country. The 30%
global bond component is a capitalization-weighted average of the country
indices of the Salomon Brothers World Government Bond Index. The U.S. cash
reserve component is the bond equivalent yield of the Federal Reserve's
published average offering rate on 30-day commercial paper. The index is
adjusted to reduce the exposure of foreign currency fluctuations by hedging back
into U.S. dollars one half of the foreign currency exposure resulting from
equity holdings and all of the foreign currency exposure resulting from the bond
holdings. The countries included in this index will be the U.S., Canada, the
United Kingdom, France, Germany, Spain, Japan, Australia and Hong Kong (there
will be no bond investments in Hong Kong). The Global Balanced Index will be
reviewed semi-annually and with approval of the Fund's Officers may be changed
to reflect additions or deletions of countries from the advisor's mandate going
forward.
The following table sets forth the incentive/penalty adjustment to the
basic advisory fee payable by the Portfolio to Strategic Investment Management.
<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH PERFORMANCE PERFORMANCE FEE AS A
VS. THE GLOBAL BALANCED INDEX PERCENTAGE OF BASE FEE*
-------------------------------- -----------------------
<S> <C>
Less than -0.75%..................................................... -0.75% X Base Fee
-0.75% to +2.25%..................................................... -0.50% X Base Fee
Between +2.25% and +5.25%............................................ -0.25% X Base Fee
Between +5.25% and +8.25%............................................ Base Fee
Between +8.25% and +11.25%........................................... 0.25% X Base Fee
Between +11.25% and +14.25%.......................................... 0.50% X Base Fee
Over +14.25%......................................................... 0.75% X Base Fee
</TABLE>
- ---------------
* The Base Fee represents the annual rate used in calculating the base advisory
fee multiplied by the average assets for the performance period measured to
calculate the incentive/penalty adjustment.
Under the rules of the Security and Exchange Commission, the
incentive/penalty fee structure will not be fully operable until the quarter
ending October 31, 1998, and, until that date, will be calculated according to
the following transition rules.
(a) Prior to September 1, 1996. For the quarters ending on or prior to
August 1, 1996, the incentive/penalty fee will not be operable. The
advisory fee payable by the Global Asset Allocation Portfolio shall be
the basic fee, calculated as set forth above.
12
<PAGE> 62
(b) September 1, 1996 through October 31, 1998. Beginning with the quarter
ending October 31, 1996, and until the quarter ending October 31, 1998,
the incentive/penalty fee will be based on a comparison of the
investment performance of the Global Asset Allocation Portfolio and the
MSCI All Country Index over the number of months that have elapsed
between November 1, 1995 and the end of the quarter for which the fee
is being computed.
(c) On and After November 1, 1998. For the quarter ending January 31,
1999, and thereafter, the period used to calculate the
incentive/penalty fee shall be the 36 months preceding the end of the
quarter for which the fee is being computed.
RELATED INFORMATION CONCERNING SIM. SIM, 1001 19th Street North, 16th
Floor, Arlington, VA provides asset management services to companies,
institutions and individuals. SIM (and its affiliated companies) provides over
$15 billion in assets under management. Michael J. Duffy, Managing Director of
SIM serves as portfolio manager for the Global Asset Allocation Portfolio.
The agreement with SIM continues until July 6, 1997 under the same terms
and conditions as described on page 10 with respect to Marathon-London.
13
<PAGE> 63
SECURITIES TRANSACTIONS
The investment advisory agreements with Marathon-London, Husic, and
Strategic Investment Management authorize each investment adviser (with the
approval of the Fund's Board of Directors) to select the brokers or dealers that
will execute the purchases and sales of securities for the Portfolio of the Fund
that it manages and directs each investment adviser to use its best efforts to
obtain the best available price and most favorable execution with respect to all
transactions for such Portfolios. Each investment adviser has undertaken to
execute each investment transaction at a price and commission which provides the
most favorable total cost or proceeds reasonably obtainable under the
circumstances.
In placing portfolio transactions, each of the Fund's investment advisers
will use its best judgment to choose the broker most capable of providing the
brokerage services necessary to obtain best available price and most favorable
execution. The full range and quality of brokerage services available will be
considered in making these determinations. In those instances where it is
reasonably determined that more than one broker can offer the brokerage services
needed to obtain the best available price and most favorable execution,
consideration may be given to those brokers which supply investment research and
statistical information, and provide other services in addition to execution
services to the Fund and/or the investment adviser. Each investment adviser
considers the investment services it receives useful in the performance of its
obligations under the agreement but is unable to determine the amount by which
such services may reduce its expenses.
The investment advisory agreement also incorporates the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the Fund's Board of Directors, each investment adviser may cause the
Fund to pay a broker-dealer which furnishes brokerage and research services a
higher commission than that which might be charged by another broker-dealer for
effecting the same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of the investment adviser to the Fund and the other Funds in
the Group.
Currently, it is the Fund's policy that each investment adviser may at
times pay higher commissions in recognition of brokerage services felt necessary
for the achievement of better execution of certain securities transactions that
otherwise might not be available. An investment adviser will only pay such
higher commissions if it believes this to be in the best interest of the Fund.
Some brokers or dealers who may receive such higher commissions in recognition
of brokerage services related to execution of securities transactions are also
providers of research information to the investment adviser and/or the Fund.
However, the investment adviser has informed the Fund that it will not pay
higher commission rates specifically for the purpose of obtaining research
services.
Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, the Fund may place portfolio orders with qualified
broker-dealers who recommend the sale of shares of the Fund and may, when a
number of brokers and dealers can provide comparable best price and execution on
a particular transaction, consider the sale of Fund shares by a broker or dealer
in selecting among qualified broker-dealers.
Some securities considered for investment by one Portfolio may also be
appropriate for the other Portfolios and the other Funds and/or clients served
by the investment advisers. If purchase or sale of securities consistent with
the investment policies of a Portfolio, the other Portfolios and/or one or more
of these other Funds or clients are considered at or about the same time,
transactions in such securities will be allocated among the Portfolios and the
several Funds and clients in a manner deemed equitable by the respective
investment adviser. Although there will be no specified formula for allocating
such transactions, the allocation methods used, and the results of such
allocations, will be subject to periodic review by the Fund's Board of
Directors.
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund or any Portfolio,
and (iii) to reduce or waive the minimum for initial and subsequent investments
as well as
14
<PAGE> 64
redemption fees for certain fiduciary accounts such as employee benefit plans or
under circumstances where certain economies can be achieved in sales of the
Fund's shares.
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading on
the Exchange is restricted as determined by the Securities and Exchange
Commission (the "Commission"), (ii) during any period when an emergency exists
as defined by the rules of the Commission as a result of which it is not
reasonably practicable for the Fund to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods as
the Commission may permit.
The Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% or the net assets of the Fund at
the beginning of such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid in whole or in part, in investment securities or in cash, as the Directors
may deem advisable; however, payment will be made wholly in cash unless the
Directors believe that economic or market conditions exist which would make a
practice detrimental to the best interests of the Fund. If redemptions are paid
in investment securities, such securities will be valued as set forth in the
Prospectus under "The Share Price of Each Portfolio" and a redeeming shareholder
would normally incur brokerage expenses if he converted these securities to
cash.
COMPARATIVE INDEXES
Each of the investment company members of The Vanguard Group, including
Vanguard Horizon Fund, Inc., may, from time to time, use one or more of the
following unmanaged indices for comparative performance purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies representing the U.S. Stock Market.
WILSHIRE 5000 EQUITY INDEXES -- consists of approximately 6,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and Poor's 500 Index.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
MORGAN STANLEY CAPITAL INTERNATIONAL ALL COUNTRY INDEX -- is an arithmetic,
market value-weighted average of the performance of over 2,427 securities listed
on the stock exchanges of countries included in the EAFE Index, United States,
Canada, and Emerging Markets.
CAPITAL OPPORTUNITIES FUND STOCK INDEX -- the Index is composed of the various
common stocks that are held in the largest aggressive growth stock mutual funds,
using year-end net assets, monitored by Morningstar, Inc.
GLOBAL BALANCED INDEX -- an adjusted capitalization-weighted average of the MSCI
World Index and the Salomon Brothers World Government Bond Index.
MORGAN STANLEY CAPITAL INTERNATIONAL WORLD INDEX -- an arithmetic, market
value-weighted average of the performance of over 1,460 securities listed on the
stock exchanges of 23 countries.
SALOMON BROTHERS WORLD GOVERNMENT BOND INDEX -- a market capitalization-weighted
index consisting of government bond markets of 14 countries.
15
<PAGE> 65
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 67 bonds and 33
preferreds. The original list of names was generated by screening for
convertible issues of 100 million or greater in market capitalization. The index
is priced monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly issued,
non-convertible corporate bonds rated AA or AAA. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
LEHMAN LONG-TERM TREASURY BOND -- is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND -- consists of over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds.
LEHMAN CORPORATE (BAA) BOND INDEX -- all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND -- is a yield index on current coupon
high-grade general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the average
yield for four high-grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX -- 35% Standard & Poor's 500 Index and 65% Salomon Brothers High
Grade Bond Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Salomon Brothers High
Grade Bond Index.
RUSSELL 2000 SMALL COMPANY STOCK INDEX -- consists of the smallest 2,000 stocks
within the Russell 3000; a widely-used benchmark for small capitalization common
stocks.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB- or better. The Index has a market value of over
$4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX -- is
a market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between 5 and 10
years. The index has a market value of over $600 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a market
weighted index that contains individually priced U.S. Treasury, agency, and
corporate securities rated BBB- or better with maturities greater than 10 years.
The index has a market value of over $900 billion.
LIPPER BALANCED FUND AVERAGE -- An industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- An industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
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<PAGE> 66
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE -- An industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Analytical Services, Inc.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE -- the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper
defines a small company growth fund as a fund that by prospectus or portfolio
practice, limits its investments to companies on the basis of the size of the
company. From time to time, Vanguard may advertise using the average performance
and/or the average expense ratio of the small company growth funds. (This fund
category was first established in 1982. For years prior to 1982, the results of
the Lipper Small Company Growth category were estimated using the returns of the
Funds that constituted the Group at its inception.)
RUSSELL 3000 INDEX -- consists of approximately the 3,000 largest stocks of U.S.
domiciled companies commonly traded on the New York and American Stock Exchanges
or the NASDAQ over-the-counter market, accounting for over 90% of the market
value of publicly traded Stocks in the U.S.
RUSSELL 2000(R) VALUE INDEX -- composed of the 2,000 smallest securities in the
Russell 3000 Index, representing approximately 7% of the Russell 3000 total
market capitalization.
RUSSELL MIDCAP(TM) INDEX -- composed of all medium and medium/small companies in
the Russell 1000 Index.
Advertisements which refer to the use of the fund as a potential investment
for Individual Retirement Accounts may quote a total return based upon
compounding of dividends on which it is presumed no Federal income tax applies.
In assessing such comparisons of yields, an investor should keep in mind
that the composition of the investments in the reported averages is not
identical to the Fund's Portfolio and that the items included in the
calculations of such averages may not be identical to the formula used by the
Fund to calculate its yield. In addition there can be no assurance that the Fund
will continue its performance as compared to such other averages.
17
